From 6 April 2015, trustees of schemes that provide (broadly) money purchase or cash balance benefits will be required to signpost individuals entitled to those benefits to the Government’s new guidance service, Pension Wise, and provide them with prescribed information on the occurrence of certain triggers. The Pensions Regulator is also encouraging trustees to include risk warnings in their communications with members and obtain appropriate declarations before members take their benefits.
Beyond this, trustees need to develop a holistic strategy for communicating with their members about the new pension flexibilities and be prepared to deal with member queries.
The new legal requirements
The legal requirements relating to the provision of information to members are being updated in response to the new pension flexibilities that will be available from 6 April 2015 to individuals with “flexible benefits”, meaning:
- money purchase benefits (including money purchase AVCs in defined benefit schemes)
- cash balance benefits, or
- benefits (including AVCs) calculated by reference to an amount available for their provision (whether the amount available is calculated by reference to payments made or any other factor).
Trustees will be required to provide prescribed information to such members:
- within 4 months of an individual’s retirement date (i.e. normally the retirement date specified by the member or, where no date has been specified, the scheme’s normal retirement date),
- within 20 days of an individual specifying a retirement date, where there are less than 4 months until that date, or
- where a member who has an opportunity to transfer their benefits out of the scheme and is aged 54 years and 8 months or older or satisfies the ‘ill health condition’ (i.e. the ill health test under the tax legislation that must be met before someone can access their benefits before age 55):
- within 2 months of the member requesting information about what they can do with their benefits,
- within 2 months of the member informing the trustees that they are considering, or have made a decision, about what to do with their benefits, or
- within 20 days of communication between the trustees and the member about what the member may do with their benefits.
What information must be provided?
On the occurrence of information triggers 1, 2, 3a and 3b, the trustees must provide information which includes:
- a statement of the options available to the member under the scheme
- a statement that the member has the opportunity to transfer their benefits to one or more other pension providers
- a statement that different pension providers may offer different options, including the option to select an annuity
- a statement that different options have different features, different rates of payment, different charges and different tax implications
- a copy of guidance to be issued by the Pensions Regulator that explains the characteristic features of the different options or a statement that gives materially the same information
- a statement that free and impartial pensions guidance is available via Pension Wise and details of how this can be accessed
- a statement that the individual should access pensions guidance and consider taking independent advice to help them decide which option is most suitable for them
- an estimate of the cash equivalent of any of the member’s benefits that may be accessed flexibly (including details of any guarantees or any other features, restrictions or conditions that may affect the value of the relevant benefits), and
- a statement about the tax implications of accessing benefits flexibly.
More limited information needs to be provided where trigger 3c is met.
If information has been provided to the member within the past 12 months as a result of one of the triggers having been met, the obligation to provide information may not arise, or the information that needs to be provided may vary, depending on what information was previously provided.
The Pensions Regulator has issued draft guidance for trustees on communicating with members about the pension flexibilities. In this, the Regulator encourages trustees to provide generic risk warnings to a member regarding annuities, flexible drawdown, taking benefits as cash and pension scams at the point where the member is required to make a final decision about how they take their benefits.
The Regulator also recommends that before trustees process a member’s choice they ask the member to sign declarations confirming:
- whether they have received guidance from Pension Wise and/or regulated advice, and
- that they have read the risk warnings.
Sample risk warnings and member declarations are included in the Regulator’s draft guidance. However, we think that these could be clearer and so trustees should consider tailoring these for their scheme (which the Regulator encourages them to do in any event).
In light of these new legal requirements, trustees need to:
- identify the different ways in which members may communicate with the scheme which may lead to information triggers 3a, b and/or c arising. This may include, for example, a discussion with the HR department, a call to the scheme administrator or its call centre, an email to the scheme administrator or a web chat
- put in place appropriate systems to identify when an information trigger has occurred and ensure the relevant information is sent to the member within the relevant timescale, and
- update scheme literature so that it contains the required information.
These new legal requirements are cumbersome and increase the disclosure burden on schemes. Trustees need to consider carefully how they will apply in the context of their particular scheme. They also need to form a view on some of the grey areas. For example, what constitutes “communication” between trustees and a member about what the member may do with their benefits? Will this trigger be met where a member speaks to their HR department or visits a scheme’s website?
As well as complying with these minimum information requirements, trustees should also review their communications more generally in light of the new freedoms to ensure that they are fit for purpose whilst not constituting advice to the members. In particular, members need to understand the options available to them and where they can access help as they make their choices. Schemes also need to be prepared to deal with member queries relating to the new freedoms both in terms of resource and having a clear and consistent approach when responding to questions to ensure trustees are not held to be giving advice or encouraging a member to take a particular course of action.