Advice in an auto enrolment world
We look at what the FSA are saying about advice before and after auto enrolment.
In May 2011, the FSA published Policy Statement PS11/8 – ‘Pension reform – Conduct of business changes.’
Read the full FSA paper
Whilst this may not sound like the most exciting FSA paper ever, it does set out what advice will look and feel like ahead of the introduction of automatic enrolment and beyond.
Here’s a summary.
The FSA’s three tenets of automatic enrolment
To start with, it’s worth setting out the three basic principles that the FSA holds as fact:
- It’s in the best interests of most people to stay in or join a workplace pension scheme where the employer pays into it.
- It’s impossible to identify in advance those who will be at risk of not benefiting from pension saving.
- The biggest risk to consumers in an automatic enrolment world is that they will opt out ‘inappropriately’ and lose the right to their employer’s pension contribution.
The Conduct of Business Sourcebook (COBS) rule changes
These are split into two parts:
Part 1 - Group Personal Pensions (GPPs) being used for automatic enrolment
These rules will generally apply from the date that the employer duties apply to an employer in line with their staging dates, and not before their staging date.
a) The Distance Marketing Directive (DMD)
The DMD (which currently prevents automatic enrolment into GPPs) will NOT apply where a GPP is being used by an employer to satisfy their automatic enrolment duties.
So from an employer’s staging date, employees can be auto enrolled into a GPP if that GPP is being used as an automatic enrolment scheme.
Key Features Documents for GPPs will no longer have to mention stakeholder as an alternatively available product. In addition, future Key Features Documents need not mention stakeholder or NEST as alternatively available products.
c) Cancellation and opt outs
The cancellation and opt out processes will be aligned so that when someone is automatically enrolled then opts out, it’s treated as a cancellation under FSA rules.
Part 2 – Other changes
This deals with the other changes to COBS brought about by automatic enrolment:
a) Advice on pension opt outs
The pension opt out requirements will be extended from just occupational schemes to cover GPPs where the employer is contributing.
What this means in practice is that advice on opt outs from a GPP where the employer is paying in favour of an individual personal pension will have to be checked by a ‘pension transfer specialist’.
However the rules on transfers are not affected so any DC transfers will not have to be checked by a ‘pension transfer specialist’.
b) Advice on additional contributions and suitability on advice on personal pensions
The starting point for additional contributions should be that these should be made to any existing group pension scheme of the member. Advisers must consider and compare the existing workplace pension scheme before recommending an alternative for any additional contributions.
RU64 currently means that advisers must consider stakeholder pensions when looking at the suitability of an individual personal pension plan. With automatic enrolment, as all employees will be (at least initially) in an employer’s workplace pension scheme, RU64 cannot apply.
However RU64 will still apply to those who are not automatically enrolled, i.e. the self-employed. So not only will RU64 still apply, it will be extended to cover NEST, as the self-employed can voluntarily join.
So the COBS rules will be extended so that advisers must consider NEST as well as stakeholder when advising the self-employed on pension saving.
Other issues for the pensions market
The FSA recognised that other aspects of automatic enrolment will inevitably shape the corporate pensions market of the future.
a) GPP charge cap
The FSA will not set a cap on charges for GPPs used for automatic enrolment and say that the DWP should do this, if and when they believe it is necessary to do so.
At the moment, there is no indication that any cap will be set. The FSA do however say that any product design should keep the consumer in mind and charges set at an appropriate level.
They give a specific example that flat rate charges may not be suitable for employers who experience high turnover rates as small pension pots could be eroded more.
b) Default funds
The FSA recognise that the default fund is important for consumer outcomes, but have left it to the DWP to provide guidance on this.
c) GPP vs NEST?
Whilst the FSA recognised that there are benefits inherent with a GPP which may not/cannot be matched by NEST, they say “While we agree there are other factors that are relevant, we believe that charges and default funds are the primary issues”.
The FSA have not gone as far as to prescribe this focus on charges and investment but it does seem clear that any recommendation for a GPP instead of NEST will have to consider these in some depth.
d) Admin, admin, admin
With potentially many millions of new pension savers comes a whole heap of administration. The FSA have said that they will work with DWP to try and achieve a joined up approach to reduce regulatory burdens on providers and advisers as much as possible.
e) The Individual Pensions Market
Individual pension savers who are automatically enrolled into an employer’s pension scheme may stop paying into their existing plan. This will inevitably lead to many of these policies lapsing and becoming paid up.
This is recognised as an issue by the FSA but they will not be issuing any guidance or amending any rules to take account of this.
Individual advice in the run up to 2012
The FSA will not be issuing any guidance ahead of 2012 but do re-iterate that individuals should not necessarily put off pension saving ahead of 2012 especially given that the staging period extends to 2017.
Published July 2011
For professional advisers only