In December 2022 the Financial Conduct Authority issued its final rules in respect of default funds for non-workplace pensions (NWPs) and those having significant cash holdings, in their policy statement PS22/15.
While the default fund option rules will only apply to new non-advised NWPS, the significant cash holdings rules will apply to all NWPs whether advised or not.
It is important that advisers understand the new rules and the options being proposed. They are due to be implemented on December 1 2023 and follow a discussion paper issued by the FCA in 2018, a feedback statement in early 2019 and a consultation paper issued in November 2021.
Why are the changes happening?
Consumers can save for a pension through a NWP or a workplace pension. NWPs are used by a wide range of consumers, including the employed, the self-employed, the unemployed and those in newer types of employment.
As the market for NWPs has developed, the range of investments that could be included in an NWP has grown.
The FCA is concerned that non-advised consumers find it difficult to engage with investments and end up making poor choices for their NWP. That is because the range of investments available today can be very wide and complex.
Some non-advised consumers may choose investments that are not properly diversified or otherwise aligned with their pension objectives.
The FCA wants to ensure that there is support for consumers faced with this complexity, in an easy-to-access, standardised investment NWP option.
The final rules for cash warnings are intended to protect consumers who have already held a significant and sustained level of cash in their NWP. The cash warning would highlight how inflation erodes the value of cash investments. It is intended to prompt consumers to consider whether they should remain in cash or switch to growth assets.
This is all part of the aim from the FCA to deliver a pensions system that helps consumers achieve the best outcomes within the means available to them.
More broadly, the new rules will help firms meet the FCA’s expectations in the consumer duty for them to act to deliver good outcomes for retail consumers.
It also supports the FCA’s aims in their consumer investment strategy to give consumers the confidence to invest.
What are the high-level changes?
The new rules require that NWP providers:
- offer a default option to non-advised consumers buying a NWP; and
- issue a cash warning to consumers with significant and sustained levels of cash in their NWP to warn them that their pension savings are at risk of being eroded by inflation.
It applies to firms that operate NWP, including:
- Life insurers.
- Platform providers.
- Self-invested personal pension operators.
The outcomes the FCA are seeking are that:
- the default options are fair value and designed to meet the needs of the typical non‑advised consumer choosing them;
- on average, there is a better pension outcome for consumers choosing a default option than they could otherwise achieve on their own; and
- fewer consumers hold a significant and sustained levels of cash in their NWPs over the longer term.
The default fund option in detail
The FCA found that many consumers with NWPs struggle to make investment choices beyond deciding that they want a pension.
They feel that presenting consumers with multiple options would not address the harm of consumers not being able to choose an investment option.
The NWP providers that fall under the new requirement will need to provide a default investment option to any new non-advised customers at the time they take out the new pension.
Consumers will need to be clearly given the choice of one default option. Firms will need to present consumers with an appropriate default option without them having to answer detailed questions in advance.
