Retirement Reforms and the Guidance Guarantee

PS 15/4 Retirement Reforms and the Guidance Guarantee: Retirement Risk Warnings

Compliance Consultant Lee Werrell offers a simple guide to one of the most important issues of the year.

www.fca.org.uk/static/documents/policy-statements/ps15-04.pdf

It’s obvious that consumers must be given personalised retirement risk warnings when they would like to access their pension savings. But the FCA does not intend to treat these communications as regulated advice, the regulator has confirmed in this Policy Statement.

PS 15/4 is another of those FCA statements which turn out to be more significant than a seemingly banal headline might seem to suggest. It follows on, of course, from the 2014 Budget announcement on proposals for fundamental changes to the options that consumers will have for accessing their DC pension savings at retirement. And those options, as you won’t need reminding, mean that customers are able to:

• Take their pension savings as cash (in a one-time payment or perhaps smaller amounts over time);
• Buy an annuity (or another income-generating guaranteed product);
• Select a drawdown pension without having any limits applied;
• Use any combination of these.

Why No Consultation?

The rules have been published without consultation because of the fact that a delay involved in consultation could well be detrimental to consumers’ interests. The regulator is planning for a consultation on updating rules within the pension and retirement area in the summer of 2015, after a thorough review. The FCA will consult at this time on whether or not to retain, modify or enhance the rules outlined in this Policy Statement.

So What’s Required?

Under the new rules, Providers and platforms must ask the customer set questions to identify whether risks exist, and present appropriate retirement risk warnings in response to the answers to these questions. You should read the whole document to learn exactly what is required; but I highlight the actions below.

Firms will be required to identify the main risk factors related to the pension decumulation products they provide to consumers and make preparations for accurate questions that will assist them in identifying and establishing the existence of those risk factors in relation to each one of the pension decumulation products offered. Risk factors for the purchase of a single life annuity would include whether an individual has a partner or dependents, with the warning explaining that they may not be provided for on the individual’s death.

The new rules will pertain to providers holding the consumer’s pension assets, including SIPP operators and execution-only firms, and providers contacted by a consumer looking to purchase a decumulation product using a provider.

As with any uncrystallised fund pension lump sum, risk factors include tax implications, sustainability of income in retirement, charges, debt, and impact on means-tested benefits or the prevalence of investment scams. Drawdown risk factors include all of these, plus a question asking whether or not the consumer has shopped around?

Risk Warnings

Retirement risk warnings are expected to be provided in whatever way the customer is in contact with the company. There are no exclusions or caveats. Additionally the risk warnings must be given even where consumers happen to have been through Pension Wise guidance, although they aren’t going to be necessary where an individual has received full advice.

The regulator says that the most recent rules will not require firms to replicate the Pension Wise service. Instead, and in addition to Pension Wise, the rules ensure firms will flag specific risks to customers, and give them appropriate warnings about the choices they have in accessing their pension savings. These warnings might include setting out options the customer has, for example, shopping around.

The FCA says that these retirement risk warnings can be given without providing regulated advice; they are not requiring firms to tell consumers what to do or implying that the consumer’s decision will be wrong. They are simply requiring firms to ensure the consumer is aware of the risks of the course of action they are seeking to take. The new rules are laid out in the PS Appendix of the “made rules” to become COBS 19.7.

The retirement risk warnings must be given to the consumer regardless of whether they have already received “Pensions Guidance” from “Pension Wise” (see PS 14/17) or taken regulated advice. See Section 3.4 for further details.

The Retirement Risks Identification Process

The Process is simple although there can be misunderstandings.

1. Trigger Event: Customer decides to access their pension.

1.1 Question if they have taken pensions guidance or received regulated advice

1.2 If Yes – Go To Step 2

1.3 If No or unsure – direct to Pensions Guidance or take regulated advice; if accepted they go back to Step 1.

1.4 If they decline advice or guidance and want to proceed – continue.

2. Based on how the Customer wishes to access their pension pot, set questions need to be answered to identify which risk factors are present.
3. Firm to provide appropriate risk warnings in response to answers to the set questions.

Expected risk warnings will depend on the product selected and will include those in the table below, Firms may add additional warnings if their product requires it.

4: Other – Risk factors relevant to how the consumer has decided to access their pension savings.

Conclusion

The new rules lay out a simple process to ensure that customer detriment should be minimalized, but obviously will need application by firms and advisors across the retirement spectrum. If you have any issues with this Policy Statement, please refer to your qualified Compliance Professional or go to www.ComplianceConsultant.org.

The Questions

The main considerations are covered in Section 3.34 of the Policy Statement and are replicated here.

• Consumer’s state of health: Are there aspects of the consumer’s health or lifestyle that would make them potentially eligible for a better value annuity – for example, an enhanced annuity?
• Loss of guarantees: Will the consumer lose any guarantees attached to the pension?
• Whether the consumer has a partner or dependants: Does the consumer have a partner or dependents who might benefit from a joint life annuity (where they are not already purchasing one)?
• Inflation: If the consumer is seeking to buy a level annuity, do they understand that inflation will erode the real value of the income they receive from their annuity?
• Whether the consumer has Shopped Around: Has the consumer shopped around different providers before choosing to buy the product?
• Sustainability of income in retirement: Is the consumer expecting the money they take from the pension to help provide an income in retirement?
• Tax implications: Does the consumer understand the tax implications of taking money from their pension savings?
• Charges (if a consumer intends to invest their pension savings): Has the consumer considered how the charges they may face when investing their pension savings elsewhere compare with those on their pension savings?
• Impact on means-tested benefits: Is the consumer aware that taking money from their pension may impact on any means-tested benefits they receive?
• Debt: Is the consumer aware that creditors may have a call on any money taken from pension savings?
• Investment scams: Is the consumer aware that investment scams exist, and that they should be careful where they invest money taken from their pension savings?