FCA has fundamental part to play in regulating workplace pensions

But the UK’s financial regulator, the Financial Conduct Authority, also has a part to play that many are not quite so aware of.

Employers and trustees need to ensure they are not inadvertently providing regulated financial advice or potentially carrying out other regulated activities. Problem areas can include: 

• Promoting non-occupational pension schemes;

• Employers designing and monitoring the default investment in a Group Personal Pension;

• Trustee involvement in the delivery of retirement products such as drawdown; and

• Employers and trustees using advice and guidance solutions where the end consumer is the worker or scheme member.

Developments in DC workplace pensions mean these are precisely the issues many employers and trustees are grappling with. 

Keeping up with the times

Workers are now enrolled by default, invest by default and contribute at minimum levels. Employers have generally used DC schemes for auto-enrolment, whether in the form of FCA-regulated GPPs or master or other trust arrangements, regulated by the Pensions Regulator.

Regulatory rules control what can and should be said, yet guidance from the FCA has not always been clear

The traditional concept of ‘retirement’ has been replaced by the attainment of age 55, at which point workers can plump for cash, drawdown or buy an annuity from their DC pension savings, or even a blend of all three.

Many employers and trustees are considering whether to offer these options through their own occupational schemes. There are advantages, but this is not a step to take lightly. Drawdown in particular is a sophisticated investment product where the member takes on the risk of the money running out.

Some trustee boards are instead looking to partner with third-party retirement product providers. Again, there are risks. But there are risks too with leaving members to their own devices at retirement, especially for workers who have been accustomed to default choices being made for them. 

A balance must be struck, ideally paving the way for good outcomes. To help with this, trustees and employers might logically pair with independent financial advisers – something which will become more cost (and tax) effective for employers as a result of the FCA and Treasury Financial Advice Market Review recommendations.

And the complication continues. Following the 2016 budget, we have the prospect of the FCA-regulated workplace lifetime Isa. Resembling a pension, it is somehow not quite a pension. What will workers make of that?

Regulatory guidance is not always clear

Regulatory rules control what can and should be said, yet guidance from the FCA has not always been clear. It is helpful therefore that, backed by the FCA, FAMR also recommended that employers take a more active role in “supporting workers’ financial health”.

The FCA will work with employers in particular to ensure an understanding of the rules and to carefully navigate tricky areas.

Even if the workplace offering does not lead to regulatory issues, employers and trustees must be on guard. There is still the law of misrepresentation and misstatement to contend with, and a duty of care that accompanies the trustee and employer role, any breach of which might lead to claims and complaints. 

Communication needs to be honest and accurate and avoid well-intentioned embellishment that overplays the virtues of what is, ultimately, a complex financial product.

If there is a mismatch 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 does not 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 law firm Pinsent Masons