While the industry must safeguard members, experts warn the FCA’s surprise protections may end up alienating the people they are designed to help
The Financial Conduct Authority recently announced that it will introduce additional protection for consumers wishing to access their defined contribution pension pots from April.
Most of the pensions industry has greeted the surprise announcement as an unqualified victory for pension scheme savers, who may be unaware of the far-reaching implications of their pensions choices.
So far, the details of the additional protection are still to be confirmed. But we do know that pension providers will have to quiz consumers about their circumstances before releasing their pension pot.
For example, when a customer asks to access their pension, the provider will need to ask questions about their marital status, in case the customer is unaware that they may want to buy an annuity which could be passed on to their husband or wife if they die before them.
Providers will also need to warn customers about the possible tax ramifications of withdrawing their pension in one go.
“How far will a set of standardised warnings or checks influence customer behaviour in practice?”
The implications of making the wrong decision at retirement can be severe. As Christopher Woolard, the FCA’s director of strategy and competition noted in a letter to the chief executives of the major pension providers: “In some instances these choices will be irreversible, and people, especially if they do not take the guidance, may not be well equipped to make these decisions.”
Therefore, the industry is right to applaud the spirit of the FCA’s announcement. But some warn that the practicalities of providing additional protection may prove complex – and that it may overcomplicate the customer’s experience without changing their behaviour.
“We support this extra level of consumer protection,” said Rod McKie, pension provider Zurich’s head of retirement propositions. “However, we are conscious that customers will not want too many barriers placed in their way if they wish to exercise their new options from April onwards.
“As a result, we are keen to ensure there is a balance between helping customers to achieve a good outcome and delivering a positive customer experience that is not overly demanding,” McKie concluded.
Andy Lewis, an associate in law firm Hogan Lovells’ pensions team, agrees with McKie. “Across the industry, providers and trustees are working hard to stay on the right side of the line, while also trying to help customers make informed choices from 6 April.
“The introduction of new provider requirements may help protect the position but is a very tricky balancing act. On the one hand, it is not appropriate to cut across the guidance guarantee or start critically assessing the customer’s decisions. On the other, how far will a set of standardised warnings or checks influence customer behaviour in practice?”
John Reeve, a senior consultant at Premier Pensions Management, says: “Whilst it is helpful for the providers to ask these questions of the customer one is forced to ask what they can do with the information and whether the customer will take any notice.
“Once the customer has decided to take the cash then it is likely that he or she will also already have decided how they are going to spend it. It is going to be difficult to persuade them otherwise.
“It seems unlikely that a member with his or her heart set on cash is going to be persuaded to go back to their IFA by a few well-meaning questions and statements,” concludes Reeve.
“It seems unlikely that a member with his or her heart set on cash is going to be persuaded to go back to their IFA by a few well-meaning questions and statements”
Girish Menezes of Xerox, which provides administration services to pension schemes, warns that the practicalities of implementing a second level of protection may prove onerous, in a blog. “With the legislation geared toward improving retirement outcomes for members, more thought should be given to the administration pressures of delivering this to these members.
“Robust administration requires lead times to put appropriate processes, systems and training in place. As an industry, we should fully recognise the importance of administration, invest in it adequately, and ensure that we give administrators the lead times to deliver the high quality solution all of us want to achieve.”
More consumer protection can only be a good thing. But the FCA must tread carefully to make sure that it does not end up a hollow box-ticking exercise which puts out already-stretched providers while alienating those very same, all-important consumers.
They don’t have long to hash out the details.
Reeve concludes: “All of this does start to look like the government may be thinking that, having made this policy announcement, they now realise that they have unleashed a mighty force that they cannot control. The policy is too popular to change and so they are looking to get others to help to ‘get the cat back in the bag’!”