Amanda Cooke: Developing a divergent system in workplace pensions for FCA-regulated pensions to trust based ones could potentially lead to inconsistent treatment of members
The latest of the Society of Pension Professionals’ (SPP’s) regular columns says targeted support can help close the current advice gap if it is widely adopted by FCA-regulated firms and the framework includes trustees of occupational schemes.
Auto-enrolment (AE) has boosted workplace pension saving but not member engagement, with an advice gap between generic guidance (e.g. Pension Wise) and holistic financial advice, which affects the value of savings and impacts pensions adequacy.
The recent Financial Conduct Authority (FCA) proposals for targeted support as part of its Advice Guidance Boundary Review, intends to bridge this gap by requiring firms to define consumer segments and offer ready-made solutions for better outcomes. This scalable approach aims to improve decision-making for members with similar characteristics.
Regulatory framework
The pensions industry, not least through the Society of Pension Professionals (SPP), has expressed concerns on how these proposals align with other workplace policy initiatives and regulations, such as dashboards, consumer duty, the new value for money (VFM) framework, consolidation of defaults and changes to pension taxation e.g. inheritance tax.
Members of trust-based schemes will also experience the advice gap and greater clarity is required on how trustees can assist their members without inadvertently offering regulated financial advice. Developing a divergent system in workplace pensions for FCA-regulated pensions to trust based ones could potentially lead to inconsistent treatment of members across different types of pensions and further contribute to regulatory uncertainty.
In addition, targeted support should reflect existing known issues such as pension scams, inequalities, inadequacies in personal savings, and commercial pressures that may suppress employer contribution rates.
Thresholds
The FCA's proposed threshold for delivering a better outcome than if targeted support was not provided lacks clarity. The consumer duty mandates "good" outcomes, but it is unclear whether avoiding a poor outcome equates to providing a good or better outcome. The recent consultation paper advises firms against adopting an overly conservative approach to the advice guidance boundary, noting this may not yield good customer outcomes. Whilst the FCA expects firms to use targeted support to address current gaps, it is uncertain whether failing to offer targeted support would fall short of consumer duty requirements and what the practical distinction is between avoiding a poor outcome and achieving a good or better outcome.
Even after clarifying this point, the complex legacy framework makes it difficult to identify "better" in some cases. For example, comparing a with-profits guarantee with potentially higher investment returns. The proposals also exclude the purchase of a specific annuity from targeted support despite the fact that a customer can presently buy an annuity without advice—meaning a customer can currently make an irreversible decision with less support than they would receive through a targeted support process!
Targeted support without comprehensive pension information could result in unsuitable recommendations, so the policy needs to be integrated with the dashboard framework to access sufficient data. Even with the data available, further consideration needs to be given to identifying the lead provider, establishing safeguards, and allocating risks and responsibilities.
Consumer segments must be carefully considered and reviewed regularly to ensure inclusivity and ensure a wide variety of factors and situations are considered.
Regret risk and claims
Targeted Support may increase the risk of complaints to providers due to a misalignment with consumer segments, unlawful discrimination, or data protection breaches. Decisions around pensions carry inherent uncertainty and potential unintended consequences. For example, complaints may arise from tax or investment losses and providers will need clarity on responsibilities and the risk of ombudsman complaints. Some may decline to offer targeted support if such risks are unclear or high. Firms also require guidance from the FCA, Financial Ombudsman, and Information Commissioner's Office on the distinction between targeted support and regulated advice, and on data use.
Next steps
Targeted support can help close the current advice gap if FCA-regulated firms widely adopt it and the framework includes trustees of occupational pension schemes. This also depends on having proportionate thresholds, clear regulatory guidelines, and further guidance on the necessary customer data for verification. We await the next steps from the FCA with interest.
Dr Amanda Cooke is chair of the financial services regulation committee at the Society of Pension Professionals and a senior associate at CMS
