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Article | Pensions Briefing

What do the FCA’s new retirement rules mean for trustees?

Supporting your retirees

Defined Contribution|Pension Board and Trustee Consulting

By Anne Jones | March 18, 2019

What do the FCA’s new retirement rules mean for trustees? Members face complex decisions when choosing how to take their retirement savings. Contract based providers now need to abide by new guidelines. How can trustees help their members understand their options and obtain the best value for their savings?

As the Financial Conduct Authority (FCA) releases new rules covering retirement support for contract based pension arrangements, Anne Jones looks at the new requirements and considers how trustees can ensure their members are able to achieve the best value from their retirement savings.

The FCA published the results of its review of members’ retirement options last summer. The findings were a cause for concern with a quarter of new drawdown members saying they would prefer a guaranteed income for life over flexibility, and individuals who could have withdrawn 13% more income each year from their drawdown account by shopping around for lower charges. As part of this review, the FCA promised to enforce changes to support better member outcomes at retirement.

What are the new rules?

The first new rules were confirmed by the FCA last month. From November 2019, providers of contract based pension arrangements will now need to provide ‘wake up packs’ to all members from age fifty and every five years thereafter. Providers will still have some freedom around the content of the wake up packs, but they need to include a single page summary document as well as various other educational materials, for example retirement risk warnings, the Money and Pensions Service factsheet (or similar) and details of the options open to individuals. Importantly, however, the wake up packs cannot include any marketing materials. If members wish to purchase an annuity, the provider must establish whether they could be eligible for a higher income due to health or lifestyle issues. The enhanced annuity quote must then be provided to the member. When a member enters a drawdown arrangement, they must be provided with a key information summary and then provided with annual information about their costs and charges thereafter.

In addition, the FCA launched a follow up consultation, proposing investment pathways for drawdown products – automatic investment journeys dependent on what the member says they wish to use their savings for. At the same time, the FCA is proposing to ban the use of cash funds as a default investment strategy for drawdown arrangements.

This is obviously all good news and a move in the right direction for contract based pension schemes, but what does it mean for members of trust-based schemes?

Implications for Trustees

Whilst the new rules only apply to contract based schemes, which are regulated by the FCA, trustees have a duty of care to ensure that their members are appropriately educated about their options. To quote the Pension Regulator’s DC Code of Practice (No. 13):

"Good member communications, provided at the right time and in the right format, are vital if members are to engage and make decisions that lead to good outcomes in retirement."

Trustees have a duty of care to ensure that their members are appropriately educated about their options.

Where one pension regulatory body starts, the other often follows. We would therefore expect the Pension Regulator to start increasing the requirements around retirement support in due course, potentially mirroring the new requirements for contract based scheme providers. So, should trustees wait to see what these new rules might be?

The answer to this will depend on the scheme’s population. If the scheme is relatively new with nearly all members below age fifty, the trustees can potentially wait and see. However, if there are a significant number of members over fifty, waiting for the new rules could be too late to help them.

Trustees, therefore, may wish to consider what education they will provide to their members, and when and how they will do so.

With individuals changing jobs every five years on average, many will have retirement savings in at least one contact based scheme. If they start to receive information about retirement options from one scheme at age fifty, they are likely to expect to receive information about their other retirement savings too and may well be prompted to request it. Trustees, therefore, may wish to consider what education they will provide to their members, and when and how they will do so.

Liaising with the employer to ensure retirement support is joined up across the employer’s pension arrangements will help ensure members aren’t receiving mixed or confusing messages. The majority of contract based providers can, understandably, only give guidance and advice on their own products and solutions. Trustees can provide broader, more educational information. They therefore have a key role in helping their members understand the retirement options available in the wider market, and how to choose the most appropriate option(s).

Individuals learn in different ways so utilizing a range of engagement methods will help support these different styles. Online factual information, case studies and online tools can be supplemented with face to face seminars, guidance or videos to have the biggest impact. The key is to understand which forms of engagement would suit your membership and at which point in the retirement journey to use them.

Providing the right support to members on this challenging journey will help ensure that the time and effort the trustees have spent running the scheme is not frittered away on bad decisions and poor value arrangements.

To understand the support Willis Towers Watson is able to provide in designing your retirement journey, please contact your Willis Towers Watson consultant about Retire Able.

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