Contract-based pension providers must provide 'personalised' risk warnings to savers, says FCA

Out-Law News | 03 Mar 2015 | 11:20 am | 2 min. read

UK pension providers will be required to provide personalised risk warnings to customers before they will be able to access their savings, even if they are getting free guidance from the government-backed Pension Wise service.

The Financial Conduct Authority (FCA) announced in January that it would require providers to ask savers taking advantage of new more flexible rules governing how they access their pensions about "key aspects" potentially influencing their decisions. It has now published its final rules, which it is introducing without consultation in its consumer protection capacity.

"The pension reforms give those people who are nearing retirement greater choice on what to do with their pension pots," said Christopher Woolard, the FCA's director of strategy and competition. "We want to ensure that they get the right information so that they can make informed decisions about their future."

The FCA said it would consult on whether to retain, modify or add to the new rules in the summer, as part of a wider consultation on the rules around customers' interaction with pension providers as they approach retirement.

From April 2015, members of defined contribution (DC) pension schemes will have more freedom to access their pension savings in any way that they wish from the age of 55, without facing heavy tax penalties or necessarily having to buy an annuity. This new freedom will be backed by a right to guaranteed free and impartial guidance at the point of retirement, through a government-backed service called Pension Wise.

Face to face Pension Wise guidance will be provided by the Citizens Advice Bureaux in Scotland, Northern Ireland and England and Wales, while telephone guidance will be provided by the Pensions Advisory Service. Online guidance will also be available. Although this guidance will be tailored and personalised, it will not recommend specific steps, products or providers in the same way as regulated financial advice.

Pension providers will be required to tell their customers about the Pension Wise service, and to include a recommendation that customers consult either the Pension Wise service or a regulated financial adviser in all communications about retirement options, once the new rules are in force. However, customers will not be compelled to seek guidance or advice. The FCA's additional protections are designed to ensure that those customers that do not take regulated advice receive enough information to make important and sometimes irreversible financial decisions.

Firms will be required to give their customers personalised risk warnings at the point that the customer contacts them to access their pension savings. They will also be required to keep records showing that the customer received the warnings, and whether that customer went on to take regulated advice or guidance from Pension Wise. Firms will be able to design their own warnings, but these warnings should consider the state of the customer's health, tax implications, the impact on means-tested benefits and investment scams, among other relevant issues.

The new rules will apply to providers of contract-based pensions, which are regulated by the FCA. The Pensions Regulator, which regulates trust-based schemes, will publish complementary guidance for trustees once the relevant disclosure regulations are finalised. FCA-regulated firms that administer occupational trust-based DC schemes will be encouraged to give members of those schemes "the same risk warnings as the customers of the contract-based schemes they operate", according to the guidance.

"It will be a struggle for providers of contract-based DC schemes to put in place processes to ask specific questions of savers wanting to take their benefits and provide risk warnings where necessary in the short period of time available," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind "This is no easy task since the FCA has simply outlined some of the risk factors, and left it open for providers to devise their own risk wording."