From 6 April 2016, occupational pension schemes providing flexible benefits (broadly, money purchase or cash balance benefits) are required by law to provide members with risk warnings about their retirement options. This puts onto a statutory footing for the first time the so-called “second line of defence” for members who are seeking to access the new pension flexibilities introduced exactly a year ago.
Government concerns with the introduction of the pension flexibilities
In the run up to the introduction of the pension flexibilities in April 2015, the government became increasingly concerned that pension savers might end up making poor decisions once the new options (such as taking all benefits as a cash lump sum) became available.
In light of these concerns, the FCA and the Pensions Regulator exercised their respective regulatory powers ahead of April 2015 to require providers and pension scheme trustees to issue members with written warnings, setting out the risks associated with the various benefit options now available to savers under schemes providing flexible benefits. These warnings were intended to provide a “second line of defence” by way of back-up to the Pension Wise service, use of which is voluntary.
The FCA’s requirements impose an obligation to give warnings that are tailored to the individual saver. Recognising that trustees will generally not be suitably qualified, or equipped to provide equivalent tailored warnings to their members, the Regulator has only required occupational schemes to provide generic risk warnings.
Whilst many schemes have complied with the requirements of the Regulator’s guidance, the DWP remained concerned that not all schemes are doing so. It decided, following consultation in late 2015 (the DWP response to which was published in March 2016), to make the provision of generic risk warnings a statutory requirement for occupational schemes that provide flexible benefits.
The new requirements to provide retirement risk warnings
The Occupational and Personal Pension Scheme (Disclosure of Information) Regulations 2013 are amended from 6 April 2016, to introduce a requirement to provide retirement risk warnings.
A risk warning is a generic, non-tailored statement that sets out the characteristic attributes and features of an annuity, lump sum and drawdown pension (to the extent the member is given access to them). The warning should include the attributes “that have the potential to adversely affect retirement income” and the factors that “have the potential to affect the appropriateness of an annuity, lump sum and drawdown pension for a member such as: the impact of health status and lifestyle choices; whether a member has dependants, is in debt or in receipt of means tested benefits; and any other relevant factors”. Note that there will be no obligation on trustees to provide the individually tailored warnings required in relation to contract based schemes.
Trustees must also provide a statement “asking the member to note the importance of (a) reading the retirement risk warnings and (b) accessing pensions guidance or independent advice”.
Some helpful changes were made to the original proposals as a result of representations received by the DWP during the consultation process. In particular:
- Schemes will only need to provide risk warnings in relation to those options which the scheme actually offers in-house (rather than having to provide warnings in respect of all possible options allowed under the tax regime).
- Schemes that voluntarily provide individually tailored risk warnings will not be required also to provide the generic information.
- Where the member is transferring out at retirement in order to access flexibilities in another scheme, the transferring scheme will not need to provide risk warnings.
- As regards timing, risk warnings should be provided, broadly, at the same time the member is provided with the means to apply for benefits (eg when paper application forms are sent out, or when access to an online retirement options portal is provided).
- A retirement risk warning need not be provided where one has been given in relation to the same action within 12 months, or where an “appropriate risk warning” has already been provided.
Eversheds’ comment on retirement risk warnings
The initial DWP proposals would have required risk warnings to be provided within seven days of the trustees becoming aware that the member has decided how to take his benefits – many respondents to the consultation were concerned that this was extremely uncertain. The change from this proposed fixed timescale to a more general requirement (that risk warnings should be given at the same time the member is provided with the means to apply for benefits) is very welcome.
Trustees have not had long to prepare for this change – the details were only finalised last month. Those that are already following the Pensions Regulator’s existing guidance should not need to make many changes, but trustees should nonetheless cross-check the details of the new provisions to ensure their retirement processes are fully compliant.