The UK’s Financial Conduct Authority (FCA) has published new rules for providers of non-workplace pensions.

The intervention was prompted by FCA findings that suggested that, like in defined contribution workplace pensions, the non-workplace pension sector suffered from low consumer engagement combined with complex and confusing products and charges. The regulator said the issue had caused a lack of competitive pressure to drive better value for consumers. It also found that non‑advised customers often may end up investing in products that do not meet their needs for retirement, or may be put off from buying a non-workplace pension altogether.

The new rules (58 pages / 716KB PDF) require that non-workplace pension providers offer a ‘default’ investment option to non-advised customers that are buying a non-workplace pension. The default will be a ready-made, standardised investment solution that providers must make available alongside the other investments they promote, as well as alongside any decision-tree-type tool they make available. Providers must also issue a ‘cash warning’ to customers with significant and sustained levels of cash in their non-workplace pension to warn them that inflation may erode their pension savings.

The default option
The new rules require providers to offer non-advised customers the possibility of investing in a solution designed to enable customers in its target market to have some reassurance that the solution is compatible with the need of those customers to grow their pension pots until retirement. The FCA said providers must also consider the likely retirement age, decumulation strategy and, accordingly, de-risking needs of customers in the target market for the product. Bespoke self-invested personal pensions (SIPPs), where providers do not promote investments for inclusion in the pension, are excluded from the requirement.

While most respondents agreed with the proposal for a single default option, a small number argued for more flexibility, including offering several default options to serve different groups of investors. The FCA rejected this suggestion, stating that a single default option was still necessary to support consumers who are struggling to make a decision. Providers are still able to offer additional investment options alongside the default option.

It will be interesting to see how the one-size-fits-all single default option interacts with the extra layer of nuance and depth added by the consumer duty. Delivering the consumer understanding outcome and complying with the cross-cutting requirement of enabling and supporting customers to achieve their financial objectives is likely to require firms to encourage customers to keep their investment in the default option under review.

This will be of particular importance in relation to the decumulation strategy aimed at by the default option. The consumer duty would arguably require providers to remind customers in a timely fashion of the decumulation strategy aimed at by the default option, and of the degree of ‘lifestyling’ or de-risking involved in it. This would support decision-making by those customers who, having initially invested in the default option, become more engaged at a later stage and realise that their objectives are no longer aligned with the objectives of the default option. A good consumer outcome in that case would be for the customer to move to another investment that is more compatible with their personal objectives.

Pension providers and manufacturers of default options will also need to consider how the price and value outcome in the consumer duty amplifies the requirement for the price and charges of the default option to bear a reasonable relationship with the services that option comprises. It is also worth noting that the FCA and The Pensions Regulator (TPR) keep working on standards for value for money measurement across the defined contribution pensions industry. Given the complexity of this area, it would not be a surprise if the remit of Independent Governance Committees (IGCs) is eventually extended to also oversee and challenge the value for money of the default option, allowing providers to incorporate the output from IGCs when complying with consumer duty requirements.

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