Key points
- Employers and trustees should review their communications with employees and pension scheme members and any plans to provide more financial information on pensions in light of the proposed updated guidance.
- A particular area the FCA has highlighted is the provision of illustrative transfer values and comparators, and employers and trustees should consider seeking advice in light of the potential for criminal offences if giving unauthorised financial advice or inducements.
Insight into FCA thinking
Nestled within Guidance Consultation 20/1 (entitled 'Advising on pension transfers') the FCA has published a consultation on an updated version of its factsheet which provides guidance for employers and trustees on providing support with financial matters without needing to be subject to regulation. In a publication which appears, on its face, to be of relevance only to FCA authorised financial advisers, there is therefore some useful information and guidance from the FCA for employers and trustees of occupational pension schemes, giving insight on where the FCA sees the perimeter line between the provision of assistance to members on financial matters and the giving of regulated advice.
An employer or trustee will only need FCA authorisation if they are in the business of providing regulated advice and if they receive a ‘commercial benefit’ for helping their employees or members. A ‘commercial benefit’ could take several forms but the most obvious would be where the firm that provides a financial product offers the employer commission or a reduction in their commercial insurance premiums. Where a firm’s pension and benefits package results in a more motivated or productive workforce we would not view this as a commercial benefit that would trigger the requirement for the firm to be FCA authorised. In the FCA’s view, employers and trustees are not generally in the business of giving regulated advice and do not normally receive any commercial benefit for giving their employees and members advice or helping them with pensions or other financial matters. So in most cases employers should be able to help their staff without needing to be authorised.
The updated factsheet provides guidance in the following areas:
Communicating information about pensions
The most likely area where employees may ask their employers or pension trustees for help is, of course, with their pension. Employers / trustees can offer help but cannot issue material that promotes a particular financial product. If you do, you risk making a ‘financial promotion’, which can only be issued by an FCA authorised person or approved by an FCA authorised firm. The factsheet gives guidance on what constitutes a financial promotion (along with a case study) and outlines the provisions that allow the promotion of a workplace or occupational scheme, as well as other financial workplace benefits.
What advice should an employer or trustee not give?
Employers and trustees will probably not be in a position to give detailed advice on questions such as:
- which of the investment funds offered by the pension scheme should I choose?
- would I be better off putting my money into an ISA rather than a pension?
- is it a good idea to transfer benefits under my old pension scheme into this scheme?
To answer these kinds of questions would need a detailed understanding of an individual’s financial circumstances and their expectations and priorities. But if you get that information and answer their questions, you could be giving regulated advice.
What an employer or trustee might want to do
Rather than answering specific questions, an employer or trustee could instead consider how they can provide more general information and support to help staff make their own financial decisions. The FCA gives its views on how an employer or trustee can do this (along with a case study), for example signposting to other sources or giving purely factual information.
Safeguarded benefits, including DB benefits
Where a member wants to give up safeguarded benefits (those that include some form of guarantee about the rate of secure pension income they will provide) for a pension that offers flexible benefits, such as a defined contribution (DC) scheme, in most cases there are certain requirements that must be met before this transaction can take place. Employers and trustees should be aware how the requirements affect how they can help members. This includes:
- The member must usually get 'appropriate independent advice' – this is a requirement where the cash equivalent transfer value of the pension is over £30,000. The draft FCA guidance sets out what trustees should check to ensure members have had such “appropriate” advice.
- Introducing members to advisers for advice - in general, an employer or trustee is unlikely to need to be authorised to make this kind of introduction if they (i) simply state that an employee will need to get advice from an FCA-authorised firm if they are interested in considering whether it may be appropriate for them to transfer (if their transfer value is more than £30,000); and (ii) signpost an industry-wide directory (such as unbiased.co.uk) and nothing more.
- Arranging for employees to get FCA regulated advice - this option is available to employers or trustees providing they take appropriate care not to undertake the regulated activities of giving advice and arranging for transactions on certain financial products themselves. The draft guidance sets out the FCA’s views on what might amount to such regulated activities.
- Paying for advice - employers must pay for ‘appropriate independent advice’ where an employer (or a trustee or a third party on its behalf) contacts 2 or more members/survivors of its DB pension scheme and sets out the available options in terms that ‘encourage, persuade or induce’ a request to transfer or convert their DB pension. The draft guidance provides further information on this requirement.
Avoiding giving advice on conversion or transfer of pension benefits
To avoid giving advice, employers and trustees should not give information that suggests whether or not a member should transfer/convert their safeguarded benefits into flexible benefits. Employers and trustees can give information that presents a balanced and factual view of the general advantages and disadvantages of keeping safeguarded benefits or transferring/converting those benefits into flexible benefits, but they should not give information to individual members based on their personal circumstances.
Some employers and trustees want to give their scheme members illustrative figures that compare the outcomes a member might get if they keep a safeguarded benefit or transfer/convert it into flexible benefits. But the FCA warns that this kind of analysis might steer a member towards a specific course of action, which is part of the regulated advice process. As a result, the FCA considers that providing such figures could mean that employers / trustees are likely to be giving advice or an inducement. If an employer or trustee provides a transfer value comparator, in accordance with the FCA’s rules, they should consider whether they are doing it by way of business and need FCA authorisation. A transfer value comparator is different to the statement of entitlement that certain members have a statutory right to request every 12 months.
The FCA’s proposed case study in this area is helpful. It runs as follows:
'A scheme offers members an online system where, among other things, they can view indicative transfer values. The employer considers that showing the cash equivalent transfer value (CETV) on their own might be seen as inducement for members to transfer out. So the employer asks for the system to ensure that, before the member can view the transfer value, they have to proceed through a series of statements highlighting the risks and benefits of keeping or giving up DB benefits.
The employer has asked the system provider to include a transfer value comparator so that the member has more context for the value of the indicative transfer value they see. When the member requests a guaranteed CETV, the scheme immediately sends the member information about The Pensions Advisory Service, and a link to the FCA video on pension transfer advice before they get the CETV. This encourages the member to get guidance and be aware of the advice process before seeking advice.'
In our view, what the draft FCA guidance demonstrates in this area, is that the giving of a CETV does not of itself amount to the provision of regulated advice (and therefore to be avoided by employers and trustees). Where an employer or trustee is planning to build a system to provide members with illustrative CETV figures, whether this is possible without straying into the FCA regulatory perimeter will come down to actual content of the portal, and potentially also the commercial structure around it (i.e. whether it can be said that the employer/trustees are offering this by way of business).
Burges Salmon is on hand to assist with your plans, or to help review existing arrangements and communications. Please do get in touch with Alice Honeywill (pensions), Tom Dunn (financial services) or your usual Burges Salmon contact if it would be helpful to discuss.