This blog first appeared in FT Adviser.
Inconsistency
How do you feel when a serially tardy friend gets annoyed at you for showing up late? Or when some random person is allowed to skip a queue that you've been waiting in for hours? Or indeed hark back to the time when your sibling got the larger portion of Neapolitan ice cream even though you’d eaten all your brussels sprouts and they’d secretly fed theirs to Lupin, your plant-based labradoodle??
I suspect frustration, anger, even anguish. All stemming from the inconsistent application of rules.
Now, I don’t feel anguish about the inconsistent approach taken across contract-based and trust-based pension schemes. But it can be frustrating. Especially when the argument for consistency is so simple: from a saver’s perspective, DC workplace pension schemes are fundamentally the same whether they are regulated by the FCA or TPR; whether IGCs or Trustees are involved. They act as a savings vehicle for customers throughout working life and ideally enable those customers to take an income in retirement.
If FCA and TPR rules differ, there's the risk of an element of inconsistency for customers as well as providers. In reality, whether a customer is part of the Standard Life Master Trust or our workplace GPP, they have big decisions to make about their pension savings that we'd like to help them with.
Mike Ambery
Retirement Savings Director at Standard Life, part of the Phoenix Group
With the announcement of the Pension Schemes Bill there is a risk of further divergence but simultaneously a chance for greater alignment, depending on how you see the glass.
The Duty vs Targeted Support
The Pension Schemes Bill announced at the King’s Speech is expected to be laid in Parliament in spring/summer 2025. The Bill will legislate for a smorgasbord of pensions policy including a duty on trustees to offer a retirement income solution or a range of solutions to their members.
While the Duty will apply in a trust-based world, Targeted Support (TS) – if implemented – will be an option for FCA-authorised firms to use in a contract-based world.
As it stands these are very different proposals. The Duty will be a legal requirement for the majority of trust-based schemes; whereas TS will likely be a discretionary offering available for FCA-authorised firms. TS as currently formulated uses a target market approach where a little data on the consumer is used to provide behavioural nudges and ‘people like you’ suggestions. It empowers people within specific consumer cohorts to take better decisions about their pension via more targeted guidance. The Duty on the other hand (as set out in the DWP’s late 2023 consultation response) will rely on ‘opt-out defaults’ where scheme members are placed in a generic solution based on the general profile of members where they do not make an active decision (note: these won’t really be defaults, and defaults won’t work anyway, but that is the policy). Trustees will be expected to develop appropriate communications and guidance as part of the service offer, but detail is limited on what this guidance should look like.
Trustees and targeted support
TPR argues that occupational schemes have the flexibility to offer TS-like guidance right now. The FCA and HMT certainly argued in DP 23/5 that rights under occupational pension schemes are not investments for the purposes of the “advising on investments” activity and therefore the boundary for investment advice is not relevant to trustees when they provide support on the options available to scheme members. Their argument would presumably carry over to any specific rules on TS.
But there are a couple of problems with this argument.
The first is that without impetus to do so, it’s not clear why trust-based schemes would necessarily offer TS-like choice architecture to help customers toward their decumulation solutions, especially given the consumer data collection and tech build required for implementation. The easiest option for those schemes will be to offer the so-called default where no active choice is made (and watch the majority of savers continue to make the active choice to cash in early). So the risk of inconsistency and poor outcomes remains without a concerted effort from the DWP and TPR toward consistency with targeted support.
The second is that it may simply be inaccurate; or at least firms are not so confident as the regulators. My discussions with ABI members that run occupational schemes (including master trusts) and law firms which advise them suggest that trustees and trustee boards are reticent to offer support tailored to customer circumstances due to the risks that 1) they are carrying out a regulated activity (i.e. advising on investments) and 2) providing more targeted guidance and support to specific cohorts of members is outside the scope of their fiduciary duty to act for the generality of their members.
Partnering
It gets even murkier where a trust-based scheme considers entering a partnering arrangement with an FCA-authorised firm, as envisaged under the new Duty. Because if the trustee uses data about the customer (e.g. their stated intentions, objectives, financial circumstances) to help steer a member toward a partner’s FCA-regulated product, would that trustee then be providing TS without the appropriate authorisations? How many trust-based schemes would want to apply for FCA authorisations to offer targeted support?
Without regulatory clarity, these regulatory risk factors further reduce the likelihood of TS-like guidance being offered by trustees.
Hope
But there is still time to prevent further dislocation between the trust-based and contract-based worlds. Targeted support will be in the development stage at least until the Pension Schemes Bill is introduced ~mid 2025. That gives officials at most 10 months to get this right.
Our recommendations:
- TPR and DWP needs to include FCA officials on their policy development of the Duty and build out the proposals around guidance and communications. DWP needs to draft the decumulation duty in a way that incorporates support for savers, and enables schemes to offer targeted support as part of it.
- FCA needs to co-create targeted support for pensions with DWP and TPR.
- Under the ‘further clarifying the boundary’ proposal within the Advice Guidance Boundary Review, the FCA and TPR should provide outcomes-based guidance to clarify the existing situation for trustees of occupational pension schemes, especially where they partner with other firms to offer FCA-regulated products.