Waking up to wake-up pack requirements

In spite of the fact that savers have now had the option of shopping around at the point of retirement for almost 40 years, the rates at which the ‘open-market option’ has been used have long been a bone of contention for the regulator.

Until the Finance Act of 1975, those starting to take an income from their pension would purchase their annuity from their existing pension provider.

Since that legislation was enacted, savers have been able to choose to buy their annuity from a range of annuity providers.

In the annuity market, this gives savers the opportunity to shop around to find the option that works best for them in terms of lump sums, guarantees, escalation, and death benefits.

Most importantly, at least in the annuity market, it means savers can move away from a provider offering a low income in retirement and find an alternative provider offering a higher ongoing pension.

The open-market option also has relevance within the drawdown market, although the benefits it potentially offers to savers work in less direct ways than within the annuity market.

Providers were also required to issue a reminder letter at least six weeks before their customer's likely retirement date.

Savers have never directly been able to access a higher annual pension by switching drawdown product. This is because the income taken from the drawdown pot is decided by the saver and their adviser, not set by the provider.

However, the range of different charges applied by drawdown providers, and the different options offered in terms of income and investment flexibility, has meant there has also been value in assessing the options available from different providers when deciding to take income.

One key difference between annuities and drawdown in terms of the ability of savers to choose between providers is that this choice can be made at any point after someone has moved into drawdown.

With an annuity, the option of moving to another provider typically has to be made at the point the annuity is initially purchased, making low levels of take-up of the open-market option a significant issue within that market.

In the drawdown market, a saver can choose to switch provider at any point before or after they have crystallised some or all of their benefits, making the take-up of the open-market option, specifically at the time benefits are initially taken, less of an issue.

Regulatory intervention

Regulators have attempted to address low levels of take-up of the open-market option on several occasions in the past.

The most significant intervention until recently came in 2002, when the then Financial Services Authority’s Traded Endowment Policy and Open Market Option Disclosure Requirements Instrument introduced the requirement for providers to issue a ‘wake-up letter’ to a pension scheme member at least four months before that customer’s intended retirement date, and also where the customer asked for a retirement quotation if this was more than four months before that date.

The information which had to be provided with the wake-up letter included:

  1. an explanation of the open-market option, including the availability of different annuity types and rates, and that the customer might get a better deal by shopping around;
  2. details of the financial advantages and disadvantages of shopping around;
  3. an explanation of how to shop around; and
  4. a recommendation to take advice.

Firms were told they could meet the requirements by sending a copy of a ‘Your pension – it’s time to choose’ factsheet, then published by the FSA.

In addition to the main wake-up letter, providers were also required to issue a reminder letter at least six weeks before their customer's likely retirement date.

The reminder had to include an estimate of the fund value that was likely to be available to be transferred or to provide an income at the customer’s retirement date.

Since its introduction in 2002, several attempts have been made – both by regulators and within financial services – to improve the effectiveness of the wake-up letter and the take-up of the open-market option.

These have included the introduction of annuity comparison sites, improvements in the content of web-based and written material available from the likes of The Pensions Advisory Service, and the Association of British Insurers’ Code of Conduct on Retirement Choices, which became effective from March 2013.

The introduction of the pension freedoms also saw the launch of Pension Wise.

While these supplementary initiatives have been launched, the timing requirements and contents themselves have remained largely unchanged since 2002.

The only significant change came in 2007, when Mifid saw the introduction of a requirement to issue an open-market option pack when an income withdrawal arrangement was discontinued for the purposes of buying an annuity.

That lack of change will soon come to an end, with the Financial Conduct Authority's Retirement Outcomes Review acting as a catalyst for a rethink of the requirements, applicable later in 2019.

Regular trigger points

Broadly speaking, the changes which we will see later this year can be broken down into the ‘when’ and the ‘what’.

Looking at the ‘when’ first, we are moving away from a simple structure where letters are issued four months and six weeks before the intended retirement date (or state pension age where no retirement date has been specified), or when an annuity is purchased from a drawdown fund.

We will soon see much more regular trigger points.

Later this year, your clients will receive their first wake-up pack within two months of reaching their 50th birthday.

They will then receive another pack between four and 10 weeks before they reach 55, and then at five-yearly intervals until they have fully crystallised their pension.

In addition to these age-based wake-up packs, the existing requirements based around the below remain in place:

  • intended retirement date (or state pension age where none has been specified);
  • customers requesting a retirement quotation; and
  • the discontinuance of a drawdown arrangement for annuity purchase.

A new requirement to issue a wake-up pack if a customer asks to access their pension savings for the first time is also introduced.

So, for example, if your client asks to access their pension for the first time a few months before their 60th birthday, the pack triggered by their 60th birthday itself may not be issued.

The calendar for issuing wake-up packs will be much more congested going forward.

If packs do not have to be issued because another has already been sent out in the previous 12 months, this is likely to be relevant in lots of cases.

Moving onto the ‘what’ changes, the big development for the wake-up packs is the removal of focus on the ‘Your pension – it’s time to choose’ factsheet, as currently owned by the Money Advice Service.

The factsheet will still be required in most instances, but will now be accompanied by a single page summary of key information about the pension, as well as a number of risk warnings.

The recommendation to seek guidance or advice will look much stranger when issued to a client who is accessing their pension savings for the first time.

The key information included in the single page summary will have to include, among other things, the value of the client’s pension savings, the amount of contributions paid to the scheme in the last year, and the client’s given retirement date.

Key from an adviser perspective is that the summary must also include a prominent section regarding the availability of, and how to access, the government’s Pension Wise service.

This must be included, even if the provider knows that the customer is advised.

The risk warnings issued to clients must be based on the main risk factors associated with their exercise of open market options, with the specific warnings given to the client based on information the provider holds about the client.

The provider must also explain what assumptions were used to prepare the risk warnings and the personal data it used when deciding which to provide.

As with the key information, the risk warnings must be provided to your client regardless of whether they are advised.

If the risk warnings are issued between 10 weeks before the client hits 55 and seven months before they hit their intended retirement date, they must include a statement that accessing pension savings at this point may not be the best option, even where they are being issued because you have advised your client to access those savings.

The requirement to issue risk warnings at the point a customer first accesses their pension also creates an interesting anomaly. Some individuals will be provided with ‘OMO-related’ risk warnings as part of this process, as well as potentially having to answer risk questions and be provided with risk warnings related to their answers to those risk questions as part of the same process.

Impact for advisers

At a very basic level, the key point for advisers to understand is that the need to issue wake-up packs in a far greater number of circumstances than has previously been the case is a provider requirement.

A provider cannot choose not to send these packs because advisers don’t want them to be sent, or even because a customer has asked not to receive them anymore.

This means advised customers will soon be receiving a recommendation to seek guidance or advice to understand their retirement options, even though they are already receiving advice.

That recommendation arguably makes some sense in relation to all the wake-up packs issued in accordance with the age-based triggers.

The recommendation to seek guidance or advice will look much stranger when issued to a client who is accessing their pension saving for the first time – one of the circumstances where the wake-up pack will have to be issued going forwards, and where that client will just have received specific advice on their chosen course of action.

This recommendation to customers to take generic guidance, even when a provider knows that advice specific to that individual’s circumstances has just been given, feels like a risk.

Head of Technical

Gareth joined AJ Bell in April 1997 and, as the company’s first SIPP administrator, helped to establish what is now the Platinum SIPP. In 2000 he became the first member of the administration team for the newly launched Sippdeal SIPP (now AJ Bell Youinvest) and in 2006 set up AJ Bell’s technical team. Gareth is responsible for analysing regulatory and technical material and communicating this within AJ Bell and to the wider world through a variety of media.