'Disparities' emerging in pensions regime, says expert, as Pensions Regulator publishes communications guidance

The regulator's approach, outlined in new draft guidance for scheme trustees, administrators and advisers, contrasts with that of the Financial Conduct Authority (FCA) which will require providers of contract-based schemes to provide personalised risk warnings to their customers before savings can be accessed. Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com said that the draft showed "new disparities emerging" between the consumer protection provisions offered by the two regimes.

"The FCA requires providers to tailor risk warnings for members, which entails asking members a number of questions about their personal circumstances - and no sample wording is provided," he said. "By contrast, the Pensions Regulator states: 'to avoid the risk of giving advice, we recommend that you do not provide specific risk warnings based on a member's individual circumstances'. Trustees of occupational pension schemes will be relieved that they have been spared the onerous requirements imposed by the FCA on contract-based schemes."

"The Pensions Regulator's helpful guidance on communicating with members about pension flexibilities explains clearly the new legal requirements, and provides useful working for drawing certain risks to members' attention. Trustees will welcome it," he said.

From April 2015, many members of pension schemes that offer defined contribution (DC) benefits will be able to access their savings more flexibly once they reach the age of 55, without facing heavy tax penalties or necessarily having to buy an annuity.

DC occupational schemes will be able to offer four main decumulation options, or means of withdrawing benefits, once the new flexibilities are in force, according to the Pensions Regulator's guidance. These are annuities or scheme pensions where offered, giving members a guaranteed income for the rest of their life; flexi-access drawdown; taking a number of cash sums at different stages; and taking the entire pension pot as cash in one go. Although not every scheme will choose to offer every type of flexibility, the draft guidance makes it clear that members will usually have the right to transfer their flexible benefits to another arrangement.

Once the new regime comes into force on 6 April, trustees and administrators will be required to inform members about the government-backed Pension Wise service as part of the information that they send out ahead of the scheme member reaching retirement date, or on any communications about flexible benefits whether initiated by the scheme or the member. The Pension Wise service will provide guaranteed free and impartial guidance through a variety of different methods, although this guidance will not recommend specific steps in the same way as regulated financial advice.

Along with the Pension Wise 'signposting' requirement, trustees and scheme administrators and trustees must include a statement of the options available to members under the scheme rules, as well as stating their right to transfer flexible benefits to other pension providers which may offer other options. They must also indicate that the different options have different features, different rates of payment, different charges and different tax implications. Scheme communications must also include an estimated value of the member's flexible benefits under the scheme, along with an indication that this value is not guaranteed.

Unlike in the FCA's rules, the Pensions Regulator's guidance does not require tailored "risk warnings" to be provided to members. Rather, the regulator said that it would "encourage" schemes to provide "generic risk warnings in respect of the four main retirement options available to members". The guidance includes sample wording that schemes can use if they choose to provide these warnings. The regulator has also recommended that schemes ask members to sign a declaration to confirm whether they have consulted Pension Wise or a regulated financial adviser, and to confirm that they have read the risk warnings.

Pensions expert Simon Laight of Pinsent Masons said that the regulator's choice of 'four main retirement options' was "somewhat arbitrary and possible misleading". In addition, it did not address the fact that scheme members could choose to use the options in combination or at different times, he said.

"Nevertheless, the process element of the guide is well constructed and will help trustees work out how they should handle the 'Freedom & Choice' flexibilities," he said. "The suggested declarations are useful."