A answer current issue in DC is the role of communications and engagement in driving good outcomes.  Better engagement by workers with their retirement saving arrangements will require more support from employers and trustees – but the greater their role, the more carefully they will require to tread to ensure that they do not stray into regulatory difficulties.

We see lots of examples of employers and trustees trying very difficult to do the proper thing in relation to pensions and workplace benefits.  However regulatory rules control what can and should be said and guidance from the Financial Conduct Authority (FCA) has not always been clear on the boundaries between which activities should and should not be regulated.

Pension providers discern this sort of territory and own been grappling with it for multitudinous years, but employers and trustees – and the third parties that act for them – require to ensure that they are not straying into providing regulated financial advice to workers / members, or potentially carrying out other regulated activities.

To be clear, there is nothing wrong with helping workers and members. We don’t desire to handover the impression that regulatory risks outweigh every the benefits; far from it. Providing access to financial information will be of grand benefit to workers who own until now been accustomed to default pension scheme membership, contribution rates and investment strategies, and there are ways to mitigate the risks. These activities must, however, be undertaken with care in what can be a highly regulated area.

There are every sorts of areas where employers and trustees could stray into regulatory difficulties:

  • promoting non-occupational pension schemes, which could involve financial promotion;
  • employers designing and monitoring, or not monitoring, the default investment in a Group Personal Pension (GPP);
  • trustees’ involvement in the delivery of retirement products such as  drawdown; and
  • employers and trustees using advice and guidance solutions where the finish consumer is the worker or scheme member.

The fresh retirement landscape

We own had a closeby revolution in the way in which we approach pensions over the past few years. Workers are now enrolled into pension schemes by default, invest by default and save at minimum levels of above. The traditional concept of ‘retirement’ has been replaced by the attainment of age 55, at which point workers can plump for cash, drawdown or buy an annuity from their DC pension savings – or even a blend of every three. The point at which individuals access these savings is also no longer necessarily the finish of their working lives – populace are now more likely to be working in some makeup for longer, to construct up for shortfalls in retirement earnings and increasing life expectancy.

Employers own generally used DC schemes for automatic enrolment: whether in the makeup of FCA-regulated GPPs; or master trust or other trust arrangements, which are regulated by The Pensions Regulator. Master trusts and GPPs involve the operate of a commercial third party to deliver the savings facility, and maybe the retirement functionality too. Employers are also offering their own trust-based schemes while the savings phase, with a small number also enabling drawdown through their own schemes.

Following this year’s budget, we also own the prospect of the workplace ‘lifetime ISA’ (LISA) to contend with, as well as the outcome of the Financial Advice and Market Review (FAMR). Although the former has grabbed most of the headlines, the latter identified a number of areas that are directly relevant to workplace pension schemes.

FAMR recommended that employers seize a more active role in “supporting workers’ financial health”.  It is further proposed that this should be supported by the FCA, which will toil with employers to construct sure that they discern the rules and don’t fall into tricky areas through the best of intentions. There are also moves to increase the ability for employers to offer payment for financial advice as a tax efficient workplace benefit, as per our comments in persist year’s ‘Age of Responsibility’ report sponsored by Redington. FAMR recommended increasing the £150 earnings tax and national insurance exemption on advice arranged by an employer to £500 per person per annum.

Some employers own decided to extend their own DC occupational schemes so that they offer drawdown and cash facilities. This approach can potentially drive lower costs for the members, and every such solutions are generally very well intentioned – looking subsequent the worker’s interests subsequent, and perhaps lengthy subsequent, the worker has retired or left the employer. However, taking this step does fundamentally vary the nature of the scheme from a savings vehicle for current workers and deferred members, to a retirement product offering a sophisticated investment to those who happened to own worked for the employer but own now retired.

This ‘retirement’ side of retirement saving is particularly difficult to grapple with. Workplace pension scheme members can now seize every of their money as cash from the age of 55; or enter into drawdown arrangements, which were previously the preserve of the relatively wealthy. These now sit alongside annuities as mass market retirement options. The downside with annuities was perceived poor worth and a lack of shopping around – but drawdown ultimately may suffer from similar problems, with the added risk that the money may not persist as lengthy as the scheme member. Deferred annuities are being used alongside drawdown products to guard against the scenario where an individual runs out of money at the age of 85, with another 10 years to live – but there are risks here too, particularly for those with smaller pension pots.

An alternative could involve trustee boards partnering with particular retirement product providers. This approach too has its risks and needs to be structured appropriately – although it could be argued that there are greater risks leaving members to their own devices at such a critical point, especially for workers who own been accustomed to default choices being made for them. Trustees and employers may also logically couple with independent financial advisers to aid members and workers decide whether to depart with the partner provider, or whether to depart elsewhere.

This is very varied to the average workplace proposition at the moment. The regulatory environment outside of occupational schemes means that this must be approached in the proper way – but the effect of FAMR should construct the appropriate direction easier to discover.

Even if the workplace offering does not lead to FCA regulatory issues, employers and trustees must unmoving be on guard. There is unmoving the law of misrepresentation and misstatement to contend with – and a duty of care that accompanies the trustee and employer role, breach of which may lead to action in negligence.

Communications require to be honest and accurate and avoid well-intentioned embellishment which overplays the virtues of what is, ultimately, a complex financial product. If there is a mis-match between retirement reality and member expectations, the first thing members will do is dust off the communications and read them very literally. If the scheme doesn’t live up to the promises made or alluded to, then there could well be trouble.

Tom Barton is a pensions law expert and Tobin Ashby a financial regulation expert at Pinsent Masons, the law firm behind Out-Law.com.