Who’s on the hook for “targeted support” of unspent pension pots?

On Friday, the FCA published the drily titled

Most of the attention will be on its proposal to introduce simple advice which can be charged for from a product and will open the door for financial sales people to sell products like ISAs and get rewarded for advice from the product (a cross-subsidy, not a commission).

What won’t get much attention is that the proposals also sanction “targeted support” that can be given by the fiduciaries of pension schemes or their agents , outside the regulatory perimeter.

Targeted support is about intervening when help is needed. For most savers – help is needed not in saving but in spending the savings. It’s needed to stop scamming, it’s needed to make choices simple (pathways) and it’s needed to provide a default, where the general need is for a lifetime income (a pension).

There is no opportunity for simple advice in “targeted support”. The FCA proposal is clear

we propose that all pension decumulation decisions are excluded from simplified advice.

The FCA are basically withdrawing their tanks from TPR’s lawn and accepting that only full financial advice should be offered on pensions. It’s all or nothing and for 90% of savers the need for advice will be supplied by targeted support (outside the scope of the FCA).

Targeted support is needed till a pot becomes a pension

To my mind, a workplace savings scheme can only be called a workplace pension if it has a clear endgame which converts a pot to a pension.

Consequently, the pension in a DC pension may not become apparent to a saver till they get to that point in life when they need their money back. It is at this point when they need “targeted support” and – as we have just heard, targeted support is about intervening to make sure that pots get properly spent.

Whether the DC savings facility is organised as a workplace or non-workplace personal savings plan, or whether as a single or multi-employer occupational savings plan, the “pension” enters the equation when a button is pressed that converts the pot to income.

In my experience, the initial prospect of having a large amount of money in a retirement savings account is quite exhilarating. IF people can get all their savings into one pot, they will often be pleasantly surprised at how much they have . However, over time, the pot becomes an encumbrance. We worry about taking the right amount out, about tax and depletion and nursing fees and passing the money on – a range of decisions we don’t want to take. We want “targeted support” and we want it more and more as we get into our sixties and seventies and I suspect by the time we are in our eighties and nineties, most of us will just want things done for us.

Drawdown is not a pension , it needs targeted support.

Currently, we consider that “drawdown” is the default way that most people will want to draw income from their pot. This would have sounded ludicrous only ten years ago, before pension freedom became a mantra. Drawdown is not however working as a means to empower our financial lives any more than personal pensions did.

And here is the FCA’s full statement on why they do not want financial salesmen selling drawdown with a “simple advice” cross subsidy.

Alongside wealth accumulation products, some respondents to CP22/24 requested that we expand the scope of a simplified advice regime to include pensions decumulation products, such as annuities, uncrystallised funds pension lump sums (UFPLS), and flexi-access drawdown (FAD).

However, we think that these are financial decisions which may typically be too complicated to incorporate into a simplified advice regime.

Drawdown decisions, for instance, may have income tax and inheritance tax planning implications, or complicated interactions with means tested benefits. So we propose that all pension decumulation decisions are excluded from simplified advice.

But here is the thing. If the complexity of these decisions becomes greater over time, , where is the budget and resource for “targeted support ” over time to those in drawdown ?

De-risking your retirement scheme of support obligations.

If a trustee or SIPP provider signposts a “Guiide” or a “Destination Retirement” or a Pension Bee and money moves into a managed drawdown, I can understand there is a transfer of risk. The old relationship has been exchanged for a new contract and the new service takes on the responsibility of targeted support.

But so long as money remains within a retirement savings trust or within the “personal savings contract” , the obligation for targeted support remains with the trustee or the SIPP provider (whether the money accumulated via AE or not).

The FCA may have washed their hands with regards simplified advice, but they have not taken away the “pension risk” from the trustee or SIPP provider. If there is no adviser, my reading is that “targeted support” will be the responsibility of the provider or trustee.

In a recent blog, Lou Davey, the Pension Regulator’s head of policy, said that TPR wanted occupational schemes providing benefits from defined contributions to become “full service providers” either by taking direct responsibility for the payment of pensions or by partnering with organisations which would.

It is clear that DB pension schemes of whatever hue, do not have any obligation to provide targeted support and I would suggest that that goes for annuity providers, once the annuity has come into payment.

The question trustees and SIPP providers should be asking, is to what extent, they remain on the hook for providing targeted support, so long as that obligation is not taken on by an adviser, or by the exchange of pot for some kind of long-term pension (including CDC and scheme pensions).

In my view, the answer is to the degree that they have a fiduciary or consumer duty. That duty may be considerably more onerous than most occupational schemes and SIPPs are prepared for. Targeted support may be the sting in the tail , for DC schemes and providers.