Stronger Nudge to pensions guidance
The DWP is consulting on proposed regulations which will require trustees and managers to “deliver a Stronger Nudge” to pensions guidance when individuals seek to access, or transfer for the purpose of accessing, the pension flexibilities applying to occupational pension schemes.
In this response
We welcome the opportunity to respond to this consultation.
We have not sought to answer every question in the consultation but have limited our responses to those areas which are pertinent to our practice.
Q1. Do you agree with our proposed approach to defining when the Stronger Nudge should be delivered? If not, what changes do you consider necessary?
We understand that the DWP has not defined what constitutes an “application to transfer pension rights or start receiving benefits” because it “want[s] to allow schemes to make decisions regarding exactly when this process is triggered”.
In our experience, most schemes send out a single pack of information around four months before retirement (known as the retirement wake-up pack) to meet the requirements of regulation 19 of The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (“the Disclosure Regulations”). This pack would usually include the application form and quote. On the current drafting, if a member has not been in touch with the scheme to start the retirement / transfer process prior to receipt of their wake-up pack (as will usually be the case) they will not have made an “application” to trigger the Stronger Nudge. In effect, the Stronger Nudge would not be triggered until the member returns a completed application form, by which point, the member has already made their decision.
This would seem to be at odds with the DWP’s desire for the Stronger Nudge to occur:
- before “sending out an application form or giving a quote”
- “as early as practical within the process”.
We agree that the aim should be that members are “nudged” to guidance before they make a decision regarding their flexible benefits. If this is the intention, we believe the Stronger Nudge should take place:
- at the time that, currently, members are signposted to guidance under regulations 18A and 18B of the Disclosure Regulations, ie at the point of first contact about their options, but from age 50 rather than age 54 and 8 months as is currently the requirement; or
- the DWP could consider requiring schemes to nudge all those approaching age 50 to take guidance on accessing their flexible benefits as a precursor to receipt of their wake-up pack.
We also believe that pensions guidance is likely to be of less value if it is taken before the member has been told what their options are under the scheme and what the value of their pot is, so it will be important that this information is provided at the same time as the Stronger Nudge.
Q2. Do you agree with our proposed approach to appointment bookings? If not, what changes do you consider necessary?
The requirement is that trustees or managers must offer to book a pensions guidance appointment “at a time and of a kind suitable” for the beneficiary. This level of organisation could be onerous for pensions managers / administrators who would need to find out this information from the member first. Were this to be required, it could result in increased administration costs which, ultimately, could be passed to members. We are therefore concerned that the proposed approach to appointment bookings could be difficult for schemes to put into practice.
Also, it is not clear from the consultation / regulations what the DWP means by “booking” the appointment. The consultation document states that the booking requirement “can be implemented via different communication methods”. For example, according to the consultation “for purely digital journeys, trustees and managers could embed the Pension Wise booking tool into their website, or provide a link to the online Pension Wise booking tool”. In contrast, the draft regulations require the trustees or managers to “book the appointment” if the member accepts their offer to do so. We cannot see that directing a member to a booking portal would constitute booking the appointment for them for the purposes of the draft regulations. Similar issues arise in relation to achieving a booking where the Stronger Nudge is sent by post.
In our view, trustees should not be required to book the appointment for the member. Rather they should be required to provide the member with all the necessary information to book an appointment for themselves.
Q3. Do you agree with our proposed approach to requiring an opt-out in a separate interaction? If not, what changes do you consider necessary?
We agree with the proposed approach to requiring an opt-out in a “separate active communication” to provide the individual with sufficient time to consider their decision and to ensure opting out isn’t too easy. We also acknowledge that by not dictating any requirements for an opt-out notification, the DWP is aiming to give schemes the flexibility to use a process which works for them. However, it would be preferable for it to be clear that there are minimum requirements which must be met for a communication to constitute an “opt-out notification”. Not only would this provide trustees with greater protection against individuals claiming, in the future, that they had not genuinely opted out, it would also potentially protect trustees from complaints that the communication they require is too onerous.
We would suggest that the opt-out is required to be in writing, both to ensure that the member applies their mind to what they are doing and to provide trustees with better protection against future complaints. We note that this would prevent a member opting out over the phone. However, requiring a member to call back to opt out (which would be needed, in order for it to be a separate communication) is not only artificial but does not necessarily put much distance between the two conversations. We think that, to be effective, there needs to be sufficient space between the interactions for the member to truly consider whether to take guidance. A template opt-out form could be sent to a member, following their indication on the phone that they would like to opt out for example.
Q4. Do you agree with our proposed approach to prevent trustees and managers proceeding with the application until they are in receipt of confirmation that the individual has opted out or received appropriate pensions guidance? If not, what changes do you consider necessary?
We agree with the principle but have some observations on the proposed requirements.
The requirement to reiterate the nudge to guidance on subsequent interactions is unduly prescriptive and potentially frustrating for members. It would be sufficient that the application cannot proceed without guidance being taken / an opt-out notification. On a subsequent interaction, the trustees (or administrator on their behalf) would naturally point out to the member that they need to do one or the other to proceed.
There is currently no requirement for a member to prove they have taken guidance and those who wish their application to proceed might well be tempted to just claim they have done so (as permitted by draft regulation 18C(11)). In addition, there is a risk that some members may believe they have taken guidance where, actually, the guidance they have taken would not count for these purposes. We would suggest that the best way to prevent this would be to use a method similar to that proposed in relation to the new scams guidance. If Pension Wise could provide an individual with a unique identifier on completion of an appointment this would be irrefutable evidence that guidance has been received. Knowing that evidence is required might also operate as another incentive to take the guidance.
Q5. Are the proposed exemptions sufficient? If not, what changes do you consider necessary?
A number of schemes we work with provide more targeted pensions guidance for their members, often at the cost of the employer or scheme, which would not constitute “pensions guidance” or “regulated financial advice” (as currently defined) and so would not trigger the exemption under draft regulation 18C(11)(a) (advice / guidance in previous 12 months). We understand there are likely policy reasons for not covering other forms of pensions guidance but it would seem reasonable for such guidance to be included. In addition, extending the exemption in this way might encourage more schemes to make this provision. We also note that, as currently drafted, the guidance for the purposes of the exemption in regulation 18C(11)(a) is not necessarily related to the application in question. We presume this is because the guidance will be generic, but note that an individual could ask different questions depending on their focus at a particular time.
The exemption for those transferring DC benefits to a DB scheme will be of no assistance in practice as this is not done. It would be useful, however, for it to be clear that the nudge does not apply where a member of a hybrid scheme transfers their DB benefits to a DB scheme. As the reference to flexible benefits is made in the definition of “relevant beneficiary” and not referenced again in regulation 18(C)(2), it would appear that a member of a hybrid scheme who has a right to flexible benefits but also other benefits and who wishes to access or transfer these non-flexible benefits, in any manner, is caught by the requirements, and we don’t believe this is the policy intention.
It is also worth noting that members with DC benefits with a DB underpin or guarantee may switch between having flexible benefits and other benefits depending on the value of their pot at a point in time. It is already difficult to apply the Disclosure Regulations to such schemes and these changes will be no exception.
We agree with the provision of an exemption for those transferring for the “sole purpose of consolidation”, but again suggest that it would be helpful if it were clear whether the trustees are expected to investigate the member’s claim and note that, without evidence, they are at risk of future complaints. We consider that a requirement for a written confirmation from the member would provide trustees with greater protection.
Q6. Is an exemption for small pots necessary? If so, how should a small pot be defined?
In our view, it would be helpful to exempt small pots of £10,000 or less, in line with the ability to commute such benefits under Part 2 of the Registered Pension Schemes (Authorised Payments) Regulations 2009, without the need for the Stronger Nudge requirements.
Q7. Will our proposed exemption for those accessing their pension benefits as a Serious Ill Health Lump Sum cover all those who should be exempted from the enhanced opt-out on ill health grounds? If not, what changes do you consider necessary?
We agree with your proposals on this point given the timescales involved with a Serious Ill Health Lump Sum.
Q8. Do you believe our proposed approach to record keeping is proportionate? If not, what changes do you consider necessary?
In practice, record keeping will be vital for risk management and we agree that the DWP’s proposed approach is proportionate to the level of risk involved. However, as noted above, as currently drafted, it is not necessary for the trustees / managers to ask the beneficiary to prove that they fall within an exemption, or that they have taken guidance. The opt-out notification is also not required to be formal and, as such, may not provide much protection against future complaints. Were the proposed drafting to remain, it would make record keeping even more crucial. As the DWP will be aware, we already see many complaints from members who wish their scheme’s trustees had done more to dissuade them from transferring to what turn out to be scam arrangements. Complaints from those who wish they had taken guidance or even advice and, with hindsight, feel their opt-out was insufficient or should have been investigated could be next.
Q9. Do you agree with our proposed approach for coordinating the Stronger Nudge and Scams Guidance appointments? If not, what changes do you consider necessary?
We think the proposed approach for coordinating the Stronger Nudge and Scams Guidance appointments could work in practice given the two types of guidance are likely to occur at different stages (ie Scams Guidance would occur after the trustees of the transferring scheme had carried out due diligence on the receiving scheme). Also, in practice, it is likely that only a small minority would be required to take Scams Guidance as well as Pension Wise guidance. However, to mitigate potential frustration with perceived duplication, we think it would be helpful for TPR to provide a template, generic, communication which explains the legal requirements and the reason both sets of guidance may be needed which could be inserted in trustee communications. This would prevent less well-resourced schemes being put at a disadvantage.
Q10. Do you foresee any problems with the interaction between the Stronger Nudge and existing signposting provisions? If so, what changes do you consider necessary?
See our answer to Q1 (above).
If the wording remains as currently drafted, the interaction between the Stronger Nudge and regulations 18A, 18B and 19 of the Disclosure Regulations will be complicated and we are not clear when the existing requirements to refer members to guidance in regulations 18A, 18B and 19 would apply. We would suggest that it would be more appropriate to revise / update existing regulations 18A, 18B and 19 to incorporate the Nudge requirements.
Q11. Are you content that regulation 2 successfully achieves its purpose? If not, what problems do you foresee and what changes do you consider necessary?
It is our understanding that the purpose of regulation 2 is to disapply the requirements to carry out the transfer within the six-month statutory timeframe where the trustees or managers are unable to proceed with a transfer application because the requirements relating to the receiving of pensions guidance or opting out of receiving such guidance have not been satisfied. The proposed drafting seems to achieve this purpose. However, it would be helpful for the DWP to clarify how this disapplication of the statutory requirement fits with other good practice guidance on transfers such as the Pensions Ombudsman’s and TPR’s expectations.
Also, the current drafting of regulation 2 means that the trustees’ duty under section 99(2) of the Pension Schemes Act 1993 could, technically, fall away because the trustees have not delivered the Stronger Nudge, rather than because the member has not confirmed they have either received appropriate pensions guidance or opted out of receiving such guidance. We suggest the drafting is amended to clarify that this section 99(2) trustee duty only falls away as a result of inaction on the part of the member, rather than on the part of the trustees or manager.
If the Stronger Nudge takes place before the application form is provided to members, the statutory time period for a transfer should not start running. It might therefore be more appropriate to amend the member’s statutory right to transfer so that it falls away where the Stronger Nudge requirements are not met or so that time period does not start running until the Stronger Nudge has been fulfilled.
Finally, it would be helpful to acknowledge that the transfer could be a non-statutory transfer (eg a partial transfer) and therefore the statutory six-month timeframe would not apply in any event. It may be helpful for guidance to clarify the expectations for non-statutory transfers.
Q18. Do you consider the proposed regulations achieve the policy intent?
As explained above, we are not certain that the proposed regulations achieve the policy intent as drafted, but with appropriate changes as suggested in this response, this policy intent is achievable.
Q19. Do you foresee any unintended consequences in our proposed approach?
Whilst we agree with the policy intent, in our view, the proposed approach and its integration with current requirements would further complicate the disclosure requirements.