TPR publishes draft essential guide to communicating with members about pension flexibilities

Introduction

On 5 March 2015, TPR published a new draft essential guide which aims to help pension scheme trustees communicate with their members about the impact and possible risks of their DC retirement choices.

Key points

Proposed changes to the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (“the Disclosure Regulations”) will alter the timing and content of communications to members of occupational pension schemes with both a right to and an opportunity to transfer “flexible benefits” (broadly, DC or cash balance benefits).
Trustees will be under a duty to “signpost” the availability of the guidance guarantee, Pension Wise, in certain specified circumstances.
In addition, TPR “encourages” trustees to provide members with generic risk warnings in respect of the four main retirement options.
Trustees must be careful not to give advice. For example, they should not provide specific risk warnings based on a member’s circumstances.

Background

On and from 6 April 2015, the Government’s pension reforms will allow DC savers greater freedom and choice over their retirement options.

Members with flexible benefits will have more options for taking retirement income and fewer restrictions on the amount they can withdraw as cash.

To help people understand their retirement choices, the Government has introduced a free and impartial advice service called Pension Wise (formerly known as the guidance guarantee). This service will be available online, over the phone or face to face.

Purpose of the draft guide

TPR’s draft guide focuses on proposed changes to the Disclosure Regulations (please see our Alert for details). It is intended to provide:

information on key changes to the Disclosure Regulations in connection with retirement communications
good practice suggestions for communicating with members about their retirement choices.

Which schemes are affected?

The changes to the Disclosure Regulations will apply to all members with both a right to and an opportunity to transfer flexible benefits (“affected members”). This means that even DC schemes which do not intend to offer the new flexibilities to their members will need to comply.

Similarly, DB or hybrid schemes will need to ensure they comply with the changes in respect of any affected members, including those whose only DC benefits are AVCs.

What must schemes do?

Making members aware of Pension Wise

The guide makes clear that, under the new Disclosure Regulations, trustees will have to tell affected members how to access Pension Wise. This duty to signpost arises in certain specified circumstances. For example, trustees will have to make a member aware of Pension Wise as part of the information “if they are over or within four months of normal minimum pension age” (currently 55) or they meet the ill-health condition under the tax rules.

To signpost Pension Wise, trustees can use the standard letter developed by the Government (available at www.pensionwise.gov.uk/signposting/assets.zip), plus a separate statement that the member should consider independent advice. Alternatively, they may develop their own statement. Such statements will have to provide certain specified information. For example, a statement that the member should access the pensions guidance and consider taking independent advice to help them decide which option is most suitable for them.

Other new requirements for retirement communications

From 6 April 2015, in addition to signposting Pension Wise, there will be new requirements regarding the information trustees send out as part of the retirement “wake-up packs”, as affected members approach their retirement date.

The guide explains the timing of these communications and specifies the statements and information which must be included. For example, at least four months before reaching their retirement date, affected members must automatically be given information which includes:

a statement that they have the opportunity to transfer flexible benefits to one or more different pension providers
a statement that different pension providers offer different options in relation to what the member can do with the flexible benefits, including the option to select an annuity
a statement that different [retirement] options have different features, different rates of payment, different charges and different tax implications.
a copy of a guide prepared or approved by TPR that explains the features of these options or a statement that gives materially the same information, as required by the changes to the Disclosure Regulations. The draft guide suggests that this is likely to be a revised version of the Money Advice Service’s leaflet “Your pensions – it’s time to choose”, although this has not yet been approved.

There are additional specified requirements for DB and hybrid schemes.

Generic risk warnings

The draft guide also sets out examples of generic risk warnings which trustees can provide to members in respect of the four main retirement options (annuity, flexi-access drawdown, taking pension as cash in stages, taking the whole pot as cash in one go), whether or not these options are offered by the scheme itself. How such warnings are communicated will be up to the scheme, but TPR sets out example wording to assist trustees in developing their new communications.

TPR “encourage[s]” trustees to provide these generic risk warnings at the point a member is required to make a final decision to take their retirement benefits in a particular form, or to take a transfer to another scheme or provider to take their benefits. This should be after the member has been sent their “wake-up” pack and even if the member has used Pension Wise as, for example, they may have changed their mind following their Pension Wise appointment. To assist trustees with the timing of all the new communications, the guide sets out an example “good practice process”.

When sending the generic risk warnings, TPR recommends that trustees also ask members to sign a statement to confirm whether they have received Pension Wise guidance or regulated advice, and to confirm that they have read the generic risk warnings. This is aimed at helping members engage with their retirement choices but would also be good practice for trustees.

Do not give advice!

TPR warns trustees to be careful to avoid giving advice to members when providing generic risk warnings. If members ask further questions about their options, they should be directed towards Pension Wise and / or an FCA regulated financial adviser. To avoid the risk of giving advice, TPR recommends that trustees do not provide specific risk warnings based on a member’s individual circumstances.

Next steps

As noted above, TPR’s draft guide is based on the current draft amendments to the Disclosure Regulations, so it could therefore change in its final form. However, given that the DC flexibility changes are due to come into force in exactly a month’s time, trustees need to make a start on their new member communications.

Please speak to your usual Sackers contact about how best to approach this exercise.