Pension buy-outs: relevance of FCA’s Consumer Duty when winding-up

Pension scheme trustees considering a buy-out are likely to welcome this, because the Duty will require the insurer to use its influence to deliver good outcomes for the members in relation to the policies. This will further strengthen the regulatory regime that applies to insurers and the protection it offers to bought out members.  

How the Consumer Duty will apply to pension schemes

In July 2022, the FCA published its rules for a new Consumer Duty that will apply to FCA-regulated firms. The new Duty will require firms to “act to deliver good outcomes for retail customers”. To comply with the new Duty, firms will need to act in good faith in respect of customers, avoid causing customers foreseeable harm, and enable and support customers. The Duty will apply to new products and services from 31 July 2023, and to all closed products and services from 31 July 2024.

Trustees of occupational pension schemes will not themselves be caught by the new Duty when they are carrying out activities regulated by the Pensions Regulator. This means the new Duty will not apply to most of trustees’ usual activities. However, it will apply to all FCA-regulated firms that provide products or services related to pension schemes if they have a material influence over outcomes for the schemes’ members.

This is relevant where defined benefit pension scheme trustees want to “buy-out” members’ benefits with a bulk annuity insurer in connection with the winding up of their scheme. A buy-out will involve the insurer issuing individual annuity policies directly to members under which benefits are secured. This will typically discharge the trustees from liability in respect of the secured benefits allowing the trustees to wind-up their pension scheme.

The new Duty will apply to the insurer from the point of buy-out to the extent it can materially influence member outcomes in respect of the policies. While the insurer will have limited scope to change the benefits secured under the individual policies – which will have been agreed in advance with the trustees – it will still have a material influence over member outcomes in other areas. For example, the insurer will be responsible for administering the policies and paying benefits when due, deciding whether individuals qualify for certain benefits – such as dependant benefits – and communicating with and supporting members regarding the policies.

Strengthening protections for bought-out pension scheme members

Trustees are likely to take comfort from the fact that the Duty will require the insurer to use its influence in these areas to deliver good outcomes for members by acting in good faith, avoiding causing members foreseeable harm, and providing members appropriate communications and support. In this sense, the new Duty reinforces principles which are already considered best practice for insurers. Trustees are also likely to welcome the FCA’s oversight in this area, given there is unlikely to be a continuing trustee body able to monitor the insurer’s operation of the buy-out policies once the pension scheme has been wound-up.

In deciding whether to proceed with a buy-out, trustees will have regard to the protections offered by the regulatory regime applicable to bulk annuity insurers. This includes regulatory requirements for insurers to treat customers fairly and hold sufficient capital, and the oversight of the FCA and Prudential Regulation Authority. The new Duty will form part of this regime and further strengthen the protection it offers to bought-out members. 

Read more on pension buy-outs:

• • Pension buy-outs: trustee liability post winding up 
  • Pension buy-outs: claim limitation periods post winding-up
  • Pension buy-outs: communicating with members about winding-up
  • Pension buy-outs: concluding the winding-up
  • Pension buy-outs: deciding how to use surplus on winding-up
  • Pension buy-outs: discharging DC assets on winding-up
  • Pension buy-outs: endgame issues for sponsors
  • Pension buy-outs: employer indemnities on winding-up
  • Pension buy-outs: incorporating pension scheme trustees before winding-up
  • Pension buy-outs: issuing individual policies using assignment before winding up
  • Pension buy-outs: making the decision to fully buy-in
  • Pension buy-outs: managing a surplus on winding-up
  • Pension buy-outs: residual risks cover for winding-up pension schemes
  • Pension buy-outs: managing the risk of ‘trapped surplus’ on winding-up