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3 major changes arising from the FCA Retirement Outcomes Review

17 February 2019

There is much for pension providers to come to terms with in the FCA’s Policy Statement and the accompanying consultation paper, says Geoff Buck, associate director, DP Pensions. He considers the 3 major changes arising from the paper.

At the end of January, the Financial Conduct Authority (FCA) published a policy statement response to the consultation it carried out in June 2018.

The key consultation areas related to:

  • Improving the effectiveness of communications before consumers access their pension savings as well as ensuring consumers accessed the support or guidance that they need
  • Reform of the ‘wake-up’ pack process
  • Improving guidance for consumers
  • Provisions of investment pathways for non-advised consumers entering drawdown
  • Additional annuity prompts for consumers

As part of the consultation exercise, the FCA has separately consulted with SIPP operators and consumers as to the changes they propose.

A further consultation paper accompanied the policy statement. This deals with proposals for investment pathways, something which the bespoke SIPP community is against as it goes against the concept of SIPPs.

The policy statement specifically deals with changes to wake-up packs, retirement risk warnings and annuity information promptsas well as making the costs of drawdown products and comparisons clearer.

These changes however will not come into effect at the same time.

Changes to wake-up packs, retirement risk warnings and annuity prompts take effect from 1 November 2019 whilst the changes for the cost of drawdown products and charge comparisons does not become effective until 6 April 2020. Either way, there is a considerable amount of work for firms to consider and implement in readiness for these rule changes.

The new rules (other than annuity prompts) are discussed below.

1. Wake up packs

The frequency of wake up pack information is increased substantially with the number of touch points with the consumer much greater and more often although the volume of information is designed in such a way to avoid consumer overload.

The first wake up pack will now be issued from age 50 so that it is aligned to the date at which consumers can first access guidance through the Pension Wise service. Further information is then supplied to the consumer at 5 year intervals until such point they have accessed their benefits in there entirety. Where a consumer has pension plans with multiple pension providers, they will receive similar content from each pension provider at the same intervals albeit this information can be supplied online rather than through the mail.

The table provided summarises the information to be issued at each stage.

2. Retirement Risk Warnings

Firms are already providing retirement risk warnings to consumers that do not take advice and so will already be familiar with this requirement. While there are rule changes, it could be argued these are not significant although it does create some practical issues given most firms are seeking to comply and apply the rules effectively.

For example, the new rules state that any risk warning must be supplied separately to the one page summary required in the wake up pack, in other words it can’t form part of the summary. The risk warnings must be restricted to one side of A4 paper and if warnings are likely to exceed one side then they must be prioritised to ensured they do fit.

Firms must also communicate the key assumptions and personal data relied upon to produce those risk warnings and these cannot be included within the same document that has the risk warnings displayed.

This does create an opportunity for firms to consider their communication with clients and the FCA is encouraging firms to do exactly that. The challenge comes with meeting a regulatory requirement where the rules are sufficiently prescriptive in terms of the information requirement.

3. Cost of drawdown products

Key feature illustrations have been a requirement of the SIPP regulatory landscape since November 2007 but the requirements have been updated in this policy statement.

There is now a requirement to include a front page summary to each illustration. Additionally, a first year charge figure needs to be shown and this must be presented in pounds and pence.

Until now, pension providers and software houses have been able to decide whether drawdown illustrations should be presented in nominal terms or real terms. From April 2020 there will be a requirement to show results in real terms i.e. inflation adjusted. This is a welcome change as it reflects the requirement under pre-retirement/accumulation illustrations which are provided in real terms.

There is also a requirement to provide illustrations where an Uncrystallised Funds Pension Lump Sum (UFPLS) is being provided as well as when funds are being extinguished. The purpose of this is to show costs to the consumer.

In summary, there is much for pension providers to come to terms with in both this Policy Statement and the accompanying consultation paper. Let us hope that the consumer finds the changes to the information helpful with their future retirement decisions.