RegulationJan 12 2023

How the FCA’s default investment options will affect advisers and providers

  • Explain the aim of new rules on non-workplace pensions
  • Understand exemptions to the rules
  • Understand how to design option and the cash rules
  • Explain the aim of new rules on non-workplace pensions
  • Understand exemptions to the rules
  • Understand how to design option and the cash rules
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CPD
Approx.30min
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How the FCA’s default investment options will affect advisers and providers
(Reuters/Toby Melville/File Photo)

But, for the moment, the design of the default option does not fall under the governance of the Independent Governance Committee or Governance Advisory Arrangement. 

Implications for advisers

At first sight it appears the default investment option will have few implications for advisers.

Their clients will not be offered it on taking out a pension.

The idea is to nudge the customer into reviewing their investments.

And there is no RU64-style rule by which advisers have to compare to the default investment option when giving a personal recommendation on pension investments.

However, the default investment option is an important development and no doubt will play a part in benchmarking investments’ performance, especially when discussing value for money and good customer outcomes.

Regular cash warnings – the rules

The second part of the new rules is for providers to warn customers if they have a significant amount invested in cash over a period of time.

The idea is to nudge the customer into reviewing their investments.

Providers will have to assess customers once every three months to establish if: 

  • they have more than £10,000 in cash; 
  • this is more than 25 per cent of their non-workplace pension;
  • this was the case in any other assessments carried out during the previous six months; and
  • the customer is more than five years away from the normal minimum pension age (NMPA) or a lower protected age.

Providers have leeway when exactly they will conduct an assessment within this three-month period – it does not have to be on a particular date. 

The wording for the cash warning, which usually has to be given within three months of the assessment, will show how inflation can erode savings over a ten-year period. 

If the customer receives a warning then providers do not have to send another warning for a year, although, of course, some providers may continue to send warnings for every three-month assessment where the customer continues to meet all the conditions. 

A provider, though, does not have to always send out a warning immediately.

They may decide that a warning is not appropriate at a given time because of the current market conditions, for example turbulence in the market meaning more people have retreated to investing in cash.

In this case there would be leeway for the provider to extend so they sent the warning six months after the assessment. 

Cash warnings have to be sent to both advised and non-advised customers.

This initiative is copying one introduced for drawdown customers in February 2021. There are however a few key differences. Providers have to monitor cash investments on an ongoing basis, rather than at only one time, when the customer enters drawdown.

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