The advent gift of new rules for pension savers

It seems as soon as the pumpkins and witches’ brooms are packed away, thoughts are turning to tinsel and mince pies.

But before we can put up that Christmas tree, there are a few packed weeks ahead on the pensions regulatory and legislative front. Although the main event may be the Autumn Statement, there is also a new set of FCA rules coming into force on 1 December, intended to make it easier for consumers with non-workplace pensions to make better investment decisions.

There are two parts to the new rules.

The first is for providers to offer a ‘default’ fund to non-advised consumers, both when a consumer first takes out or funds a pension, but also on other occasions when they are presented with a list of investments to choose from. The default fund has to be displayed prominently, at the top of any list. However, the consumer doesn’t have to choose this suggested option; they are free to opt for whatever investments they want.

The fund has to be appropriate for the target consumer market. The FCA has backed away from mandating including lifestyling, instead saying it should be included but only where appropriate for the target market. This gives some welcome flexibility to providers not to include features their customers don’t need or want.

The second part of the rules is probably of more interest to financial advisers. Providers will be required to send a warning direct to pension savers if they hold a significant amount of their pension fund (25% or more) in cash or cash-like investments for more than six months. Checks will be carried out roughly every three months, and if the customer’s investment is high in cash over all checks in a six-month period, then providers have to act. Once a cash warning is sent, providers don’t need to issue another one until at least 12 months later if the customer’s investments continue to be high in cash.

These rules apply to both advised and non-advised customers who are more than five years away from their normal minimum pension age (or lower protected pension age if they have one). So, from next summer your clients could start receiving these warnings. Obviously, there may be very good reasons for them holding a significant proportion of cash, but if you think your clients may fall into this category it’s probably worth having a word with them before the communication drops into their inbox. You may want to remind them of their current investment strategy and give them advance notice of the provider’s warning.

The FCA’s rules were finalised last year, when it could be argued the economic world was a different place. As the significance of cash or cash-like investments has risen in the past year, I wonder how more consumers may be caught unaware by the new rules purely for holding innocuous cautious funds.

It could be the FCA’s good intentions to nudge people out of cash reaches far more pension savers than they originally anticipated, prompting these consumers to question whether the cautious funds they have chosen are the best solution for their investment needs.