Default investment requirement introduced for non-workplace pensions

The Financial Conduct Authority (FCA) has published final rules requiring providers of non-workplace pensions to offer consumers a default investment option and to issue a warning about the risk of inflation eroding the value of cash holdings.

The rules, which were published alongside a new regulatory framework for dashboard providers, and will require providers to offer a ‘default’ ready-made, standardised investment option to non-advised consumers buying a non-workplace pension.

Although the FCA had initially planned to require firms to implement lifestyling, around a third of firms who responded to the FCA’s recent consultation disagreed with these proposals, believing this should be for firms to decide.

In light of this, the FCA has amended the rules to clarify that while it expects lifestyling to be appropriate in many cases, it is not required if firms decide it is not appropriate for a target market.

Industry experts have welcomed the regulator’s decision to remove the lifetsyling requirement in particular, with Canada Life technical director, Andrew Tully, explaining that “most lifestyle strategies are designed with wholly buying an annuity at a specific age and that is not what most retirees are doing and won’t be the best outcome for many”.

The new rules will also require non-workplace pension providers to issue a ‘cash warning’ to consumers with significant and sustained levels of cash in their non-workplace pension to warn them that their pension savings are at risk of being eroded by inflation.

According to the FCA, most firms agreed with the principle behind cash warnings, with the final rules therefore unchanged from the proposals consulted on, as the FCA believes proposal to require cash warnings up to five years before the normal minimum pension age to be appropriate.

The FCA acknowledged that many firms had requested at least 18 months for implementation due to the number of regulatory changes occurring at the same time.

However, the watchdog has retained the initially proposed 12-month implementation period, stating that these rules are consistent with the principles of the Consumer Duty, which come into force, for products open to sale, six months before the non-workplace rules come into force.

Firms affected by these changes will therefore need to ensure they comply by 1 December 2023.

However, the FCA is encouraging providers to send cash warnings now, given the current high levels of inflation.

The plans for the cash warning have been welcomed by industry experts, as Aegon pensions director, Steven Cameron, stressed that “in current times of record high inflation, holding cash over any longer time-period will lead to a loss of value in real terms”.

“We support the new requirements for firms to send additional communications to customers who have more than 25 per cent of their funds in cash for 6 months or more,” he added, clarifying however, that these need to be balanced with an explanation of when cash holdings may serve a purpose and also that investing isn’t risk free.

“They also need to be responsive to future patterns in cash saving interest rates and inflation,” he continued.

“The FCA has left it for each firm to decide if based on market conditions they believe it is ‘the wrong time’ to issue a cash warning. This will be very challenging at a time when few can predict where markets will move next.

"Deferring a communication for 3 months might benefit some customers if they then didn’t move out of cash before a market fall. But if markets actually rose, deferring investing could mean some customers lose out, leaving providers open to being judged with the benefit of hindsight.”

Adding to this, AJ Bell head of retirement policy, Tom Selby, stated that “while we would have preferred a less prescriptive approach than that put forward by the FCA today, we look forward to working with the regulator to ensure implementation is as smooth as possible in what is a challenging timescale”.

“With inflation in the UK now topping 11 per cent and expected to stay high well into 2023, ensuring savers with a long-term time horizon invest their money sensibly – in part to combat the deleterious impact of rising prices – is of paramount importance,” he added.

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