Employers and providers are being compelled to address the suitability of default 'lifestyling' strategies in defined contribution schemes as part of a wider consultation by the City watchdog to improve the pension market for consumers.
A raft of rules and guidance has been proposed by the Financial Conduct Authority in a paper pulling together a number of areas where it sees a need for change, many of which have been affected by the introduction of the pension freedoms earlier this year.
The future of lifestyle investment options within pension schemes is one, as the classic derisking route from equities to bonds and cash might no longer be suitable for members who do not want to use their whole pot to buy an annuity.
In its paper, the FCA makes clear that companies “need to ensure that their lifestyle profiles remain appropriate for their customers’ decumulation needs”.
Malcolm McLean, senior consultant at Barnett Waddingham, said the FCA was making the obvious point that pension schemes have to adjust their fund offering.
What the FCA is saying is [that] a lot of people just go and carry on as if nothing has happened there
Malcolm McLean, Barnett Waddingham
“People have different options as to when and how they take their money, and the whole area of lifestyle is slightly redundant now. I think there need to be some changes, and I think what the FCA is saying is a lot of people just go and carry on as if nothing has happened there,” he said.
The FCA asks that pension schemes provide communications to members to “allow them to make an informed decision” about lifestyle investment strategies.
Trustees and employers need to give guidance
However, trustees and employers have often been reluctant to give guidance for fear of moving into financial advice territory.
Consultancy Hymans Robertson partner, Rona Train, said clients were nervous about giving scheme members “anything approaching advice”.
“I think what trustees certainly have done in the past is sat well behind the sort of line of where they can move to, simply because they were so nervous about crossing that advice line,” she said.
Train said it was the job of the industry to guide employers and trustees in providing members with information.
“It’s up to ourselves as advisers to be able to… push them that little bit further whilst giving them the comfort that they aren’t crossing that advice line.”
But Peter McDonald, pensions partner at PwC, said that many trustees have already done their homework in terms of DC and lifestyle options.
“I’m finding they’re really quite on top of this. There’s a lot of pension plans now that are communicating to members, ‘here are the three default funds that are available’… If you look back five years, trustees were criticised for not spending enough time on defined contribution. My experience is that’s just not true anymore.”
The FCA consultation is open until the end of this month.
