A year ago, Chancellor George Osborne created a seismic shift in the pensions landscape when he announced in his budget changes that will revolutionise the way in which individuals can access their defined contribution (DC) pension savings.
These major legislative changes will come into effect on 6 April 2015 but, with much of the relevant regulations still to be finalised, is the industry ready for this radical new pensions world?
The new regime
From next month, individuals will have greater freedom over how they access their pensions savings from the age of 55. These new flexibilities will only apply to DC pension pots (such as SIPPs, SSASs, stakeholder and DC occupational schemes). Individuals with defined benefit savings who want to take advantage of this new freedom will have to transfer their benefits from their final salary scheme to a DC arrangement. This option is not available to members of unfunded public sector schemes.
Since the new flexibilities are optional, not all DC schemes or arrangements will choose to offer them. Legislation is therefore being amended to allow individuals to transfer between DC arrangements right up to the point of retirement if their existing scheme does not offer the new flexible access choices.
One of the new flexibilities that has received significant media attention is the ability for individuals to "cash-in" their entire pension pot, with commentators warning of pensioners being the target of mis-selling scams or dissipating their entire retirement savings.
To counter these risks, the Government has pledged to provide those approaching retirement with free and impartial guidance under its “Pension Wise” service. This will be provided through the Citizens Advice Bureau, The Pensions Advisory Service and the Pension Wise website.
The Financial Conduct Authority (FCA) has published standards for the bodies responsible for providing the Pension Wise service, which include how complaints should be dealt with; how the outcome of the guidance session should be recorded; and how those delivering the guidance should work together to ensure that all those accessing the service get a consistent outcome.
The FCA’s "second line of defence"
In response to a concern that individuals may be reluctant to use Pension Wise or consult an IFA (see further below), the FCA has introduced a "second line of defence". This is a requirement for pension providers and trustees of trust based schemes to give relevant risk warnings to individuals wanting to access their retirement savings from April. The rules, which will come into force at the same time as the new pensions freedoms, will require questions to be asked about the individual’s circumstances and reminders to be given about the Pension Wise service.
Notably, the FCA said in its recent letter that it will be possible “to provide the proposed risk warnings without providing regulated advice”.
Impact of the reforms – opportunities and risks
The Pension Wise service will not be able to provide advice. Given the consequences of a poor decision, individuals will be encouraged to consult an IFA. Indeed, where an individual wishes to transfer £30,000 or more from a defined benefit scheme to a DC arrangement, legislation will require the individual to first take advice from an IFA.
To make it easier for consumers to find a regulated adviser, the Money Advice Service is creating a Retirement Adviser Directory (RAD). Both restricted and independent advisers will be able to register for the RAD, provided they are “active in the retirement planning market” and not tied to one provider in their chosen market.
The new reforms will inevitably bring more scope for complaint. The pension and taxation changes, as well as the smudging of the distinction between "guidance" and "advice", seem likely to generate significant confusion and potential abuse. More than ever, IFAs need to strictly adhere to the FCA’s recording requirements.
There is a concern that individuals will rush from their gold-plated final salary pensions to take advantage of the DC flexibilities. Where advice is required on such transfers, the IFA will need to carefully document the "suitability" of the transfer if a successful Financial Ombudsman Service (FOS) complaint is to be avoided. Further, before registering with the RAD, IFAs should ensure that they fully understand the new pension reforms, particularly the tax implications.
While pension providers and trustees must comply with the FCA’s second line of defence requirements, they must take care not to provide advice (which most are not authorised to give) - a fine balancing act. If an IFA is involved, the situation becomes complicated since complaints about IFAs and pension providers/trustees are made to two different bodies (the FOS and the Pensions Ombudsman (PO)).
There is a Memorandum of Understanding in place between the FOS and the PO, and between The Pensions Regulator and the FCA, which allows the sharing of information about businesses as well as more generally. There is therefore a risk that information obtained by one Ombudsman may be referred to the other regulatory body, regardless of whether the consumer has complained about the IFA or the pensions provider/trustee.
The Director General of the ABI, Huw Evans, has issued a blunt warning to the Government that with just 6 weeks to go before the pension changes come into effect, the pensions industry is still seeking answers to questions that remain outstanding. Among the gaps identified by Mr Evans are the lack of a published telephone number for the Pension Wise service, and the lack of detail on how the new guidance service will work.
Mr Evans said “Critical pieces of the jigsaw are still missing and will not be in place in time. I see no point in a blame game and would hope this will not develop as the reforms go live”.
Prophetic words? We will have to wait and see.