The new DC Code is progress but must go further..
Life never stays still. Especially in the world of pensions. Just as we get used to one set of rules, or one way of working, something happens to jolt us out of familiarity. And it’s then up to us all to make the right adjustments so our life reflects the new reality.
This is the position the Pensions Regulator (TPR) has recently found itself in. Just as it had issued its Defined Contribution Code to help trustees and employers run a pension scheme, Pensions Freedoms and Choice hit the decks and it had to go back and review the Code, updating it for the new world.
I’m glad it responded quickly. The new DC code - and the ‘How To’ guides that accompany it – are an important regulatory step forward. They should go some way to giving DC schemes the confidence and means to support members and help them achieve better retirement outcomes by successfully navigating the new pensions freedoms legislation.
Our experience in this market has shown that even though it has now been over 15 months since the introduction of pension freedoms, trustees and employers seem to still be unsure how to accommodate the new flexibilities and what they mean for their members. This isn’t just a case of adding the new pension freedom solutions for members – such as changing the scheme terms to offer drawdown. Instead, it is more fundamental and goes much wider than that. Trustees and employers still seem uncertain about how to effectively communicate the changes to their members, and, specifically, how to guide their members in making the best decisions possible. This leaves members in the position of being unsure about what options they should go for, and runs the risk they make the wrong decision for their circumstances.
This hesitancy could stem from trustees and employers:
- not fully understanding the developments or the markets;
- being reluctant to take on any role that could be seen as veering towards advice; or
- having concerns about cost (although any new tax- and NI-advantaged limit of £500 for employer-arranged advice would hopefully go some way to alleviating this concern).
There is so much more trustees and employers could be actively doing in this area to help members. And I firmly believe it’s the role of the regulator to give more structure to trustees about what ‘good support’ could – and should – look like.
Part of this is emphasising the role guidance and regulated advice could play. Members can now choose from a vast range of retirement options. And whether or not each of these options is offered by the scheme, it’s the trustees’ responsibility to guide the member to making the best decision and choosing the best option or combination of options available on the market.
This is almost impossible for the vast majority of members to to do on their own. They need better guidance and many will need (and want) advice to help them make the best decisions. Trustees can point out the benefits of guidance and advice – what the differences between these services are, and how they can help the member. This is regardless of whether the employer and/or scheme offers any advice or guidance options to members (for example by working with a financial adviser).
Guidance and advice also offer a ‘personalised’ solution (even if guidance only outlines the options for that particular person). What is a good investment solution for one member could be wholly inappropriate for another. What is good value for money for one member may be of no value to another. To drive better member outcomes, we need to find a way to better personalise the journey and the engagement. Everybody’s retirement will be different. What is a quality in-retirement product for one member will be completely inappropriate for another.
The government has clearly identified employers and trustees as key influencers to encourage DC members to take advice and there is no doubt with the scale and resource at their disposal, employers are very well placed to provide, or at least facilitate, good quality cost-effective regulated advice in a way any individual member simply would not be able to access.
Now, is the time for trustees and employers to step up to the plate and to support their members in making the best financial decisions for their retirement – in the run-up to retirement, at retirement, and during retirement. Hopefully the new DC code can develop further and help them do that.
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