Thanks to James Farr of Aviva for helping me out with the FCA’s most recent pronouncements on pension lifestyling. James and I worked together at Zurich some 20 years ago and it’s great to know compliance experts at a time like this
While TR has issued guidance to trustees on the management and communication of lifestyle strategies , it has been six years since we have heard from the FCA . Its PS16/12 Policy Statement issued in April 2016 was its last word on this subject.
What follows in this blog is an edited version of that guidance, you can read the original from page 49 of the statement from this link.
The message to funders of contract based pensions where a default is required is that lifestyle is not a set and go strategy but one that needs to be reviewed regularly to ensure it meets the needs of those in the contracts.
The only published figures we have to date on how workplace savers have fared in their commercial DC schemes, comes from . Research from Corporate Adviser , this covers the leading master trusts and some workplace GPPS.
According to the returns received, 2022 saw some savers in the year of their retirement see funds fall over 16% while others created a positive return
The table is labelled “how de-risking has failed to protect savers”. On average, the saver on the brink of drawing benefits lost 8.58% of their fund in a year when inflation was over 10%.
Clearly some of the strategies have been more successful than others. Some workplace pensions didn’t offer lifestyle but continued the same strategy to and through retirement showing minimum differences in return between young and old.
And – even those which have lost most still offer some protection from the ravages inflicted by an approach that purely invests in gilts (see the pre-annuity plan offered by State Street).
The worry is not so much these large and very public plans but the smaller plans that form part of the legacy books of business of the insurers (and the smaller non-commercial occupational schemes). For instance , L&G’s IGC noted in its 2022 report
The FCA’s job – through the IGCs and GAAs is to sure that members are protected. Proof that they were should emerge in next year’s IGC and GAA reports where we should be very interested to find out what protection those close to retirement have received. The worst case scenario is a loss equivalent to the fall in bond prices over the year.
Judge for yourself whether the FCA’s guidance is sensible/
The conversation the FCA had with its stakeholders over lifestyle in 2015/16
Passages in bold have been highlighted by me
In CP15/30 we explained that, while the new pension freedoms mean that the information needs of customers are likely to be different, we believe that our existing rules and, in some instances, guidance provide:
• firms with sufficient clarity as to our expectations in this area
• an appropriate level of consumer protection.
We set out those of our existing rules and guidance that apply to lifestyling investment strategies – these broadly require ‘sufficient’ information be provided for the customer to be able to make an informed decision.
We asked: What else do you think the FCA can and should do to make firms aware of their responsibilities in relation to lifestyling investment strategies?
42 of the 86 respondents offered no comment in response to our question.
Among those providing comments there was a broad consensus around the importance of regular reviews – regardless of a lifestyling option being selected – and that policyholders should inform their advisers and/or seek advice if their circumstances or objectives change.
There was a similar consensus around the increased complexity of decumulation options that lifestyling strategies would need to address.
A number of other respondents expressed varying degrees of opposition to our introducing further rules or guidance. Some simply expressed their belief that our current rules and guidance are sufficient; others set out the difficulties they felt were inherent in arriving at appropriate lifestyling strategies and explained why they didn’t feel these would be best addressed by further rules or guidance.
Some respondents, opposed to further rules or guidance, did ask that we take steps to emphasise our existing requirements, monitor firms’ compliance and publicise best practice in the market place.
A few respondents felt that – given the relatively recent introduction of the pension freedoms –it was too early to tell whether further rules and guidance might be required. They felt that we should continue to monitor market developments and re-visit our question once the full impact of the freedoms was apparent.
Those respondents who did want us to do more to make firms aware of their responsibilities offered a wide range of suggestions as to the actions we might take.
Some felt we should codify existing best practice around the communication of lifestyling to policyholders throughout the life cycle of their policy. In some cases they identified current disclosure requirements that they felt could, usefully, be amended to include information about lifestyling, e.g. firms being required to remind their policyholders, via their annual statements, of any lifestyling investment strategy that is in place and its purpose (annuity purchase, etc.).
Other respondents asked for detailed guidance as to the form, content and frequency of policyholder communications that would meet our requirements.
Many respondents set out concerns relating to their experience of policyholders’ lack of engagement with lifestyling options.
A number of specific examples were offered, the most
common being where firms wished to change a default lifestyling option for a number of policyholders, but found that, despite repeated reminders, a significant proportion of these
policyholders had not responded to explicitly grant or deny their permission for the change to be actioned.
Some of these respondents offered specific solutions, designed to address this lack of engagement, for example:
• through focused advice, possibly delivered by Pension Wise and/or subsidised by employers
• by giving a greater role for Independent Governance Committees
• through our rules permitting these changes to be processed on an ‘opt-out’ basis, i.e. the change could proceed if the policyholder did not actively refuse their permission.
One respondent was particularly opposed to allowing changes to be processed on an ‘opt-out’ basis – arguing that firms should get the consent of their policyholders before making any such change.
Finally, some respondents offered more direct and focused suggestions – for example that we direct firms to review their lifestyle strategies and funds by an explicit deadline.
The FCA’s response
Based on the responses we received, we consider that our existing requirements continue to provide firms with enough clarity as to our expectations in this area; and a sufficient level of consumer protection.
We note that a number of respondents identified lack of consumer engagement in the context of changing default lifestyling options as a particular issue and that their preferred solution is that we change our rules to permit these
changes to be processed on an ‘opt-out’ basis.
We expect firms in all cases to comply with our rules and principles, in particular the obligation to treat their customers fairly. Firms are also required to act in the clients’ best interests, to act consistently with the contracts which they have entered into and ensure their terms are fair under unfair terms legislation. Otherwise, there is a risk of legal challenge from customers.
We accept that making changes to lifestyle investment strategies on an ‘opt out’ basis can provide good outcomes in situations where customers are shown to benefit.
However, in the event that some customers could be made worse
off by such a change, firms should consider the position of these customers and take appropriate action to ensure they are treated fairly, for example delivering enhanced communications or excluding such customers from the change.
Our supervisory work has shown varying levels of firm activity since the introduction of the pension freedoms.
Firms should continue to actively review their lifestyle investment strategies to ensure they remain appropriate for their customers and the retirement choices they are making.
Firms should remind customers of how their lifestyle investment strategy relates to the retirement options available to them and that, if their retirement needs change, they may need to review their investment strategy.
Where changes are being made to lifestyle investment strategies firms should consider:
• their right to make variations under the scheme, including whether any contractual terms are fair under unfair terms legislation
• on-going and one-off costs to the customer
• the need to model customer outcomes
• the position of customers who have recently received investment advice or who are in the lifestyle de-risking phase and take appropriate action to ensure they are treated fairly
• the customer communication strategy
This is not an exhaustive list and we would expect firms to act in accordance with our regulatory requirements.
We will continue our supervisory monitoring of how firms’ lifestyling investment strategies are evolving in response to the pension freedoms and review our requirements again, if justified by that experience.
I remember at the time being impressed by the FCA’s position which seemed balanced and reasonable. The question today is whether the FCA have exercised sufficient force through the IGCs and GAAs to make sure that consumers have been protected.
The guidance is right – but has it been followed?
In the light of what has happened in 2022 and the time since a policy statement was last made on this most important subject, I would suggest that the FCA use its eyes and ears, the IGCs and GAAs to establish how protection has worked. Without scrutiny, we will have no more idea of the damage done to saver’s pots than we did the impact of the LDI bubble on DB schemes.