Upcoming changes - action points for trustees
On 6 April 2016 new legislation will come into force which will require action by trustees of schemes containing DC benefits. In this Pensions Alert we focus in particular on new requirements for trustees to give retirement risk warnings to members, as well as noting some other upcoming changes to pension legislation.
Retirement risk warnings
Currently, there are no statutory requirements about retirement risk warnings for occupational pension schemes but guidance from the Pensions Regulator encourages trustees to provide generic risk warnings. In November 2015 the DWP issued a consultation proposing amendments to the Disclosure Regulations to introduce statutory requirements for trustees to provide members with generic retirement risk warnings. The response to that consultation and the final form of the regulations were published this month. Some changes have been made to the consultation draft of the regulations both in terms of when the risk warnings must be provided and the statutory definition of a "retirement risk warning".
When will trustees need to provide retirement risk warnings?
Trustees will have to provide a retirement risk warning at the decumulation stage, ie where:
- they are giving a member an application form, online access, information about access or any other method of access that enables the member to require the trustees to use sums or assets held for the purpose of providing "flexible benefits" (essentially DC benefits) to purchase an annuity, pay a lump sum or be designated as available for drawdown; and
- they have previously given or are giving information in accordance with the duties under the Disclosure Regulations that relate to the provision of information to members with flexible benefits or the provision of the retirement wake-up pack.
The retirement risk warning must be given at the same time as the method of access and before concluding the annuity purchase, payment of lump sum or designation to drawdown.
What information has to be provided?
A retirement risk warning is essentially a statement that is generic in nature and sets out: (i) the characteristic attributes and features of an annuity, lump sum and drawdown that have the potential to adversely affect the retirement income of any member or their survivors; and (ii) the factors that have the potential to affect the appropriateness of an annuity, lump sum and drawdown pension. The statement may be limited to the characteristic attributes and features of the options to which the member is being given access.
At the same time as giving the retirement risk warning, the trustees must provide a statement that asks the member to note the importance of reading the retirement risk warning, and accessing pensions guidance or independent advice.
Are there any exceptions to the requirements?
A retirement risk warning does not have to be given: if the trustees have provided a retirement risk warning in relation to the specific action (purchasing an annuity, paying a lump sum or designating for drawdown) within the last 12 months; and, in certain circumstances, where the trustees provide a personalised risk warning to the member.
The proposal made in the consultation draft of the regulations to include a retirement risk warning on transfers has been dropped. Instead the government will work with the Pensions Regulator to see whether the "scorpion" information regarding pension scams can include additional information on the possible risks around transfers.
The government will also work with the Pensions Regulator to provide further guidance to clarify the existing requirements in the Disclosure Regulations in relation to the provision of information to members with an opportunity to transfer flexible benefits.
Action points for trustees
Trustees will need to ensure that their communications are updated to reflect the new requirements so that they are ready to comply when providing information to members from 6 April 2016. It is helpful for trustees that in the final form of the regulations, the risk warning must be provided at the same time as the application form or other means to access the benefit, meaning that schemes should not need to put in place an additional communication point with members.
Other upcoming changes to pension legislation
It is also worth noting that a number of other changes are being made to pension legislation (not all of which are limited to schemes providing DC benefits) in April 2016 including the following.
- A ban on commission arrangements for certain occupational DC schemes which levy a charge on members to recover commission payments to advisers.
- Amendments to the audited accounts regulations to delete most of the detailed investment disclosure information and instead require a statement that the accounts have been prepared in accordance with the relevant financial reporting framework.
- Miscellaneous consequential amendments relating to the DC flexibilities including to the legislation relating to pension sharing, and the Pension Protection Fund.
- Technical amendments to the automatic enrolment legislation including the introduction of some further exceptions in relation to directors and members of limited liability partnerships and a transitional easement for the alternative DB quality requirement relating to the cost of future accruals. Whilst these are primarily employer issues, it is useful for trustees to be aware of the changes where the scheme is being used for the purposes of automatic enrolment.