Out-Law Analysis | 22 Jul 2016 | 5:36 pm | 5 min. read
A key current issue in DC is the role of communications and engagement in driving good outcomes. Better engagement by workers with their retirement saving arrangements will require more support from employers and trustees – but the greater their role, the more carefully they will need to tread to ensure that they do not stray into regulatory difficulties.
We see lots of examples of employers and trustees trying very hard to do the right thing in relation to pensions and workplace benefits. However regulatory rules control what can and should be said and guidance from the Financial Conduct Authority (FCA) has not always been clear on the boundaries between which activities should and should not be regulated.
Pension providers understand this sort of territory and have been grappling with it for many years, but employers and trustees - and the third parties that act for them - need to ensure that they are not straying into providing regulated financial advice to workers / members, or potentially carrying out other regulated activities.
To be clear, there is nothing wrong with helping workers and members. We don't want to give the impression that regulatory risks outweigh all the benefits; far from it. Providing access to financial information will be of great benefit to workers who have until now been accustomed to default pension scheme membership, contribution rates and investment strategies, and there are ways to mitigate the risks. These activities must, however, be undertaken with care in what can be a highly regulated area.
There are all sorts of areas where employers and trustees could stray into regulatory difficulties:
The new retirement landscape
We have had a near revolution in the way in which we approach pensions over the past few years. Workers are now enrolled into pension schemes by default, invest by default and save at minimum levels of above. The traditional concept of 'retirement' has been replaced by the attainment of age 55, at which point workers can plump for cash, drawdown or buy an annuity from their DC pension savings - or even a blend of all three. The point at which individuals access these savings is also no longer necessarily the end of their working lives - people are now more likely to be working in some form for longer, to make up for shortfalls in retirement income and increasing life expectancy.
Employers have generally used DC schemes for automatic enrolment: whether in the form of FCA-regulated GPPs; or master trust or other trust arrangements, which are regulated by The Pensions Regulator. Master trusts and GPPs involve the use of a commercial third party to deliver the savings facility, and maybe the retirement functionality too. Employers are also offering their own trust-based schemes during the savings phase, with a small number also enabling drawdown through their own schemes.
Following this year's budget, we also have the prospect of the workplace 'lifetime ISA' (LISA) to contend with, as well as the outcome of the Financial Advice and Market Review (FAMR). Although the former has grabbed most of the headlines, the latter identified a number of areas that are directly relevant to workplace pension schemes.
FAMR recommended that employers take a more active role in "supporting workers' financial health". It is further proposed that this should be supported by the FCA, which will work with employers to make sure that they understand the rules and don't fall into tricky areas through the best of intentions. There are also moves to increase the ability for employers to offer payment for financial advice as a tax efficient workplace benefit, as per our comments in last year's 'Age of Responsibility' report sponsored by Redington. FAMR recommended increasing the £150 income tax and national insurance exemption on advice arranged by an employer to £500 per person per annum.
Some employers have decided to extend their own DC occupational schemes so that they offer drawdown and cash facilities. This approach can potentially drive lower costs for the members, and all such solutions are generally very well intentioned - looking after the worker's interests after, and perhaps long after, the worker has retired or left the employer. However, taking this step does fundamentally change the nature of the scheme from a savings vehicle for current workers and deferred members, to a retirement product offering a sophisticated investment to those who happened to have worked for the employer but have now retired.
This 'retirement' side of retirement saving is particularly difficult to grapple with. Workplace pension scheme members can now take all of their money as cash from the age of 55; or enter into drawdown arrangements, which were previously the preserve of the relatively wealthy. These now sit alongside annuities as mass market retirement options. The downside with annuities was perceived poor value and a lack of shopping around - but drawdown ultimately might suffer from similar problems, with the added risk that the money might not last as long as the scheme member. Deferred annuities are being used alongside drawdown products to guard against the scenario where an individual runs out of money at the age of 85, with another 10 years to live - but there are risks here too, particularly for those with smaller pension pots.
An alternative could involve trustee boards partnering with particular retirement product providers. This approach too has its risks and needs to be structured appropriately - although it could be argued that there are greater risks leaving members to their own devices at such a critical point, especially for workers who have been accustomed to default choices being made for them. Trustees and employers might also logically pair with independent financial advisers to help members and workers decide whether to go with the partner provider, or whether to go elsewhere.
This is very different to the average workplace proposition at the moment. The regulatory environment outside of occupational schemes means that this must be approached in the right way – but the effect of FAMR should make the appropriate direction easier to find.
Even if the workplace offering does not lead to FCA regulatory issues, employers and trustees must still be on guard. There is still the law of misrepresentation and misstatement to contend with – and a duty of care that accompanies the trustee and employer role, breach of which might lead to action in negligence.
Communications need to be honest and accurate and avoid well-intentioned embellishment which overplays the virtues of what is, ultimately, a complex financial product. If there is a mis-match between retirement reality and member expectations, the first thing members will do is dust off the communications and read them very literally. If the scheme doesn't live up to the promises made or alluded to, then there could well be trouble.