Greater alignment needed on stronger nudge to avoid member confusion

Industry experts have raised concerns that differences in rules around the stronger nudge to pension guidance for trust- and contract-based schemes could risk confusion and “even disengagement” amongst members.

The government today (17 January) confirmed that it was pushing ahead with new requirements for occupational to implement a stronger nudge to pensions guidance from 1 June 2022, in line with the Financial Conduct Authority's rules for pension providers.

However, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, warned that whilst the stronger nudge has the potential to boost Pension Wise awareness, rules for trust and contract-based schemes need to be closely aligned “to avoid confusion, and even disengagement” from members.

“Rules around opting out of guidance are a case in point,” she explained. “People may have retirement savings across both trust and contract-based schemes and differing rules about what is classified as communicating an opt-out can prove an unwelcome complication.

“There’s also a key difference as to when the nudge can be delivered. While the FCA opted to go with delivering the nudge when the customer applies to take a retirement income, the DWP enables providers and trustees to deliver it earlier.

“While the FCA did not preclude the possibility of providers deciding to deliver a nudge earlier it set the point of application as its minimum which many providers may opt for.”

Morrissey also pointed out that the behavioural trials conducted on the nudge found that the earlier in the process the nudge was given, the more likely the person was to take up the appointment.

“Waiting until a point where someone may already have decided how they want to take their retirement income was never going to be as successful as contacting someone who is still exploring their options so it is a huge positive trustees and managers can deliver the nudge earlier in the process,” she said.

“It will be interesting to see whether take-up of guidance appointments differs across trust and contract-based schemes as a result of these differences.”

These concerns were echoed by AJ Bell head of retirement policy, Tom Selby, who suggested that, moving forward, more research needs to be done on the timing of this nudge to assess whether earlier or later interventions could be more beneficial.

Selby also agreed that it is “far from ideal” that there are “tangible differences” in the rules governing occupational pension schemes and workplace pension schemes, emphasising that, from a member perspective, there is little to no difference between the two.

“For example, there are differences in the nature and timings of when each regulator asks providers and trustees to nudge members towards guidance,” he explained.

“Similarly, the DWP rules are much more inflexible when requiring how and when members can opt out of seeking guidance, often requiring a separate communication or form to be completed. The FCA, on the other hand, has made no such stipulation.

“We hope that at some point very soon the rules will be reviewed and aligned to provide some consistency.”

However, the government addressed concerns around alignment FCA rules in its consultation response, stating that it does not view many of the alleged differences between FCA's rules and the regulations as "genuine points of difference".

It explained: "For instance, whilst our consultation asked for views on small pension pots, and the interaction between pensions safeguarding appointments and our stronger nudge proposals, there is no difference between the requirements of the FCA’s and DWP’s approaches here.

"Some differences are simply a matter of the different legislative context in which the respective organisations operate.

"For instance, on the timing of the stronger nudge, we are both amending different pieces of legislation, which means the relevant wording we use will consequentially differ.

"However, both our regulations and the FCA’s rules target the point at which a beneficiary enquires about receiving flexible benefits, and so there is no real-world contradiction in the requirements that they place on schemes in scope."

The government also confirmed that it has removed the requirement for beneficiaries to opt out in a separate communication from transfer requests, to bring the regulations and the FCA’s rules into closer alignment.

Furthermore, whilst the difference between the regulations and the FCA’s rules on the requirements to opt out in a separate interaction in relation to requests to access remains unchanged, the government confirmed that schemes concerned about running two different systems "will be able to run one system that satisfies both sets of requirements".

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