No new ideas

It’s often said there are no new ideas anymore.

That’s probably just as true in pensions as any other walk in life. Indeed, over the last few months we have seen the resurrection of an idea first heralded at the last gasp of the previous century, but which has recently been heartily adopted by the FCA once again.

I’m talking about the RU64 rule. This was originally brought in alongside the introduction of stakeholder pensions, and required advisers to effectively benchmark their pension recommendations against the ‘advantageous’ terms available under stakeholder pensions; in other words, to justify why they are recommending that pension and not the stakeholder one.

Since its introduction in March 1999, the FCA has reviewed the RU64 rule but decided to keep it in force for stakeholder pensions, despite the pension landscape being very different from when the rule was introduced 20 years ago.

But over recent months, the ‘RU64 concept’ has been making a comeback. It has made its way into three different areas of FCA pension policy – all published in July

The first is in relation to defined benefit transfers. At the end of July, the FCA published another consultation paper on defined benefit transfers. As part of this, it proposed requiring advice firms to demonstrate why the receiving pension scheme they recommend is more suitable than the consumer’s workplace pension scheme. This is intended to make it easier for an adviser to recognise the benefits associated with recommending a transfer into a workplace pension rather than a non-workplace defined contribution pension. The FCA also proposes adviser firms will have to include analysis of a transfer into the default arrangement of an available workplace pension scheme in the APTA which provides the evidence for the suitability report.

This is not a difficult task for advisers to comply with. There are very good reasons why the client’s workplace pension schemes wouldn’t be suitable for some transfers: it might not offer the pension flexibility the client wants to use in order to access pension income or might not allow transfers-in. But advisers will need to change their defined benefit advice process and make sure they meet this requirement in their suitability and APTA communications.

The FCA should publish its feedback on this consultation and final rules early next year. But there hasn’t been a big pushback against this particular proposal and I would imagine it will be adopted.

The second and third references to the old RU64 rule are connected to new and proposed rules on default investments.

In August next year, drawdown investment pathways will start. This policy change is focused on helping non-advised consumers who enter drawdown make better investment decisions. Most providers will have to offer default investment solutions which aim to meet discrete consumer objectives – such as “I plan to use my [drawdown] money to set up an annuity within the next five years”.

But this goes wider than just non-advised consumers. As part of the suitability rules, advisers – when making recommendations about the investment of drawdown funds (capped or flexi-access) – need to also consider the pathway investment the consumer could have adopted. That means first working out which one of the four discrete objectives the client holds with regards to their drawdown fund. Then, advisers must deduce which investment solution the provider is putting forward for that objective. And, finally, the adviser will have to consider why that isn’t the best solution for their client.

Again, not a difficult task in itself. But it will take some time to research as different providers will offer different investment solutions. Then the adviser will need to work their research into suitability reports for all drawdown customers every time they crystallise some drawdown, transfer from another drawdown product, or make a different drawdown investment decision. This starts in August 2020.

Finally, in their feedback statement on non-workplace pensions, the FCA put forward the idea of all non-workplace pension providers (those offering personal pensions, SIPPs and other individual pension contracts) offering a default investment pathway with lifestyling. Although this would be aimed at helping non-advised consumers, the FCA believes it could also benefit advised consumers.

It proposes advisers would be required to explain why the recommended individual pension investment is at least as suitable as the pathway investment on offer, taking account of the details of the provider’s pathway investment.

Three references – explicit or otherwise – to RU64 cannot be a coincidence. Indeed, a theme is developing, where the FCA is asking advisers to justify in more explicit terms why they are recommending a product or an investment that is different to the ‘default’ option. It looks like the RU64 concept is back with us for the 2020s.

Senior Technical Consultant

Rachel is a Senior Technical Consultant helping financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients. She’s well known within the pensions and savings industry, and regularly speaks at AJ Bell events, alongside writing content and articles for our website.