The Financial Conduct Authority said today (December 1) that all non-workplace pension providers will need to issue a “cash warning” to consumers with a certain level of cash in their pension, outlining how high inflation will erode their savings.
This is despite concerns from the industry, including from Aegon and AJ Bell, who flagged their worries to the regulator in a previous consultation.
Aegon does not think these should be called 'warnings' at all, but rather an 'alert', while AJ Bell suggested it should not be prescriptive, adding that this move would need to be implemented better.
The FCA said the cash warnings are intended to protect consumers who have already held “a significant and sustained” level of cash in their pension, and are intended to prompt consumers to consider whether they should remain in cash or switch to “growth assets”.
The new regulations, which have to be implemented by December 1 next year, are part of the FCA’s efforts to improve consumers’ engagements with pensions.
The regulator acknowledged that within the next 12 months firms have to implement the consumer duty as well, alongside high economic uncertainty.
However, it said this “must be balanced” against the ongoing harm to consumers who are struggling to make an investment choice with their pension.
[Some savers] may be put off from buying an non-workplace pension at all FCASarah Pritchard, the FCA’s executive director for markets, said: “Our proposals will encourage innovation while ensuring that we have the right rules in place to protect consumers.”
Default option
The regulator also confirmed previously consulted-on plans to require non-workplace pension providers, including platforms and Sipp operators, to offer a ready-made investment solution for non-advised consumers.
This is a result of regulatory research that has shown non-advised consumers buying a non-workplace pension often have little investment expertise and struggling to engage with the choice and complexity of solutions on offer.
“Some may end up in investments that are unlikely to meet their needs and objectives for retirement or may remain in cash,” the FCA said today.
“Others may be put off from buying an non-workplace pension at all.”
Andrew Tully, technical director at Canada Life, said it is a positive move that the regulator has listened to warnings and recognised that lifestyling will not be appropriate for all investors.
“Most lifestyle strategies are designed with wholly buying an annuity at a specific age and that is not what most retirees are doing and won’t be the best outcome for many, so we shouldn’t be requiring defaults to be designed in this way.”
He added: “Everyone is an individual and my belief is only through seeking regulated financial advice can most savers be confident in making the right ongoing decisions around investing and tax, navigating the rules as you continue through your retirement journey.”
The FCA said most respondents to the consultation agreed with this plan, though a small number argued for more flexibility, including offering several default options to serve different groups of investors.
In response, the City watchdog said providers can still offer additional investment options alongside the default option if they wish too, and can contact the FCA if they want to develop more guided propositions.
The rules have been changed to allow firms to chose the name of the default option, provided it is sufficiently clear to indicate what it is, and its difference from the firm’s other offerings.
Providers are under no obligation to offer an ESG fund as the default option, but the FCA noted they should take “proper account” of climate change and other ESG risks and opportunities.
The proposals do not apply to firms with legacy-only businesses.
Exemptions
Providers do not have to offer a default option to savers who have received a personal recommendation from an adviser for their personal pension, instead it will be for the adviser to recommend suitable investments.
Those providers which do not accept any new non-advised consumers into their personal pension products would not be required to make a default option available.
But savers will need to prove that they have taken financial advice.
The FCA's rules dictate that transactional advice on a non-workplace pension must include a personal recommendation on the underlying investments, which is the responsibility of the adviser.
The regulator has said it it not proposing that personal pension providers will have to confirm that transactional advice has included a personal recommendation on the underlying investments.
sally.hickey@ft.com
