Retirement reforms and the Guidance Guarantee – Sackers’ response to consultation
The FCA is consulting on proposed standards for delivery partners (CP14/11) in connection with the “Guidance Guarantee” that was announced at Budget 2014. This forms part of the package of changes to the pensions tax rules, which are designed to give individuals greater flexibility to access their pension savings.
In this response
- General comments
- Proposed standards for delivery partners
- Signposting customers to the guidance
- Timing of signposting and transitional provisions
- Other information requirements
We welcome the opportunity to comment on the FCA’s proposed standards for delivery partners in relation to the Guidance Guarantee. As legal advisers primarily to trustees and sponsors of workplace, trust-based pension schemes, we focus our comments on the proposed standards, sign-posting and other information requirements. We have not commented on the fee proposals for providers. As we noted in our response to HM Treasury’s consultation “Freedom and choice in pensions”, the timescale for implementing the Guidance Guarantee in April 2015 is ambitious. We therefore appreciate the FCA’s comments that the standards will be further developed in line with experience.
The proposed standards comprise broad principles for delivery of the guidance which are reasonable, in our view. The use of a principles based approach in relation to the Guidance Guarantee is sensible, for both trust and contact-based schemes. In recent years, there has been a move towards the use of principles based approaches in relation to the governance of trust-based pension schemes, which trustees are now familiar with. Use of a principles based approach can help to ensure consistent high standards across delivery partners, whilst giving firms the flexibility to meet the Guidance Guarantee in a way that is in keeping with their current practices. It will be important to ensure that the nominated delivery partners (which will include the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS)) will have the capacity to deal with this new work. We note that the FCA will be responsible for monitoring compliance with the proposed standards, in line with powers to be set out in legislation. It will be important for firms to understand how the FCA will operate in this area before the Guidance Guarantee is implemented. It will also be necessary to take account of European developments, as detailed governance requirements form a key part of the new draft Pensions (“IORP”) Directive. The Government and the FCA will need to ensure that the Guidance Guarantee can meet any additional standards imposed by the Directive.
It is intended that there will be an obligation on the FCA to make rules which require providers to signpost their pension customers to the Guidance Guarantee Service, and that there will be an equivalent obligation on the trustees of trust-based pension schemes. We agree with the FCA’s proposals regarding the content and format of the signpost. At this early stage, when products to deal with the new flexibilities are still in development, it is appropriate to leave room for further changes in this area. However, this should remain under review and, as with the proposed delivery standards, account should be taken of developments at EU level, which appear to favour standardisation of information (in this case, in the context of the pension benefit statement).
Timing of signposting is likely to be a challenge, in view of the range of flexible options that will be available to pension savers from April 2015. As we noted in our response to HM Treasury’s Freedom and choice consultation, receiving information in the run-up to an individual’s “intended retirement date” (in line with the timing requirements for the provision of wake-up packs) could come too late to enable individuals to take full advantage of the new options. In particular, the tax implications of the various options and relevant investment considerations (such as appropriate fund selection and risk profile) need to be flagged in advance, as they can make a significant difference to an individual’s retirement income. We suggested that an appropriate timeframe for the provision of guidance might therefore start ten years or more from normal pension age and that, with the anticipated rise in drawdown, such guidance will potentially be needed beyond retirement too. We therefore welcome the FCA’s comments that the timing of signposting will continue to be considered as the guidance delivery model develops. Given that retirement looks set to become much more fluid, thought will need to be given as to how an individual’s “intended retirement date” will be monitored, to ensure that both wake-up packs and the signposting of the Guidance Guarantee can be appropriately targeted. We welcome the proposal to introduce signposting before April 2015, for those who receive their wake-up packs before April 2015. This will be important to ensure that those individuals who are seeking to retire around that time are aware of the Guidance Guarantee.
The proposal to introduce provisions aimed at ensuring that the Guidance is not undermined is sensible. They are also in line with comparable provisions under the Pensions Act 2008 designed to prevent employers from inducing jobholders to opt-out of auto-enrolment pension saving. We also support the proposal that whenever providers communicate with their customers in relation to the options they have at retirement, they refer to the fact that guidance is available. We welcome the move to clarify the information that firms are required to provide. With the range of choice on offer, it will be increasingly important for pension savers to have clear information about the choices available, as well as key information about their current savings to enable them to make such choices. It is proposed that the Conduct of Business Sourcebook is updated to require a general statement about sustainability of income, and to add to the guidance that the suitability letter should include a description of the potential tax implications. In our view, this information will be key. Whilst many of the new freedoms will be attractive at first blush, it will be essential for individuals to understand the ramifications of their decisions, both in terms of the need to secure a sustainable income and the tax consequences of their decision. Similarly, the proposals to remove obsolete references, such as the reference to maximum withdrawals, whilst retaining projections of annual income in retirement / total fund, are reasonable. As noted above, the provision of tax information will be crucial in enabling individuals to understand the potential ramifications of their decisions, as the tax implications will vary significantly, depending on how an individual chooses to take their retirement savings. We therefore welcome the proposal to add a requirement for providers to provide their customers with a description of the possible tax implications when they are applying to access some, or all, of their pension fund.