- Bespoke self-invested personal pensions: providers only offering an empty shell, where the customer tells the pension scheme what investments they want to hold within their Sipp wrapper, are exempt.
- Advised customers: if the customer has received a personal recommendation on the investment of their contributions or assets in the pension, they do not have to be offered a default investment option.
- Customers with a discretionary fund manager: the rules do not apply where the customer has appointed an investment manager for the investment of their contributions or assets in the pension.
- Legacy providers: as the default option is offered when taking out a new pension, the rules will not apply to schemes that are closed to new business.
The design of the option
The FCA has rethought its plans to give the default investment option a name and instead will allow schemes to call it what they want. This is welcome news – the ‘standardised investment solution’ hardly sets pulses racing.
But whatever name providers give it, it needs to be obvious what it does and that it is different to other investments.
Providers have to give a simple description of the fund, and set out what the needs, objectives and characteristics are of the typical non-advised customer who wants a default investment option.
Providers have to make it clear it is not tailored to individual needs.
The default investment option does not have to include lifestyling if that is not appropriate for the target market.
Again, this is good news. Some customers will have a fixed idea of when they want to access the fund, and in this case de-risking may help.
But DIY platform customers are far less likely to have an age in mind, and most probably do not want to buy an annuity but instead continue an active investment strategy.
The rules do not require providers to offer an environmental, social and governance fund as a default option.
But the FCA says providers should take account of ESG when designing their default option and consider whether inclusion will meet the needs and wants of the target market.
Pension schemes will have to review their default options at least once every three years to make sure they still meet the target market’s needs.
But, for the moment, the design of the default option does not fall under the governance of the Independent Governance Committee or Governance Advisory Arrangement.
Implications for advisers
At first sight it appears the default investment option will have few implications for advisers.
Their clients will not be offered it on taking out a pension.
And there is no RU64-style rule by which advisers have to compare to the default investment option when giving a personal recommendation on pension investments.
However, the default investment option is an important development and no doubt will play a part in benchmarking investments’ performance, especially when discussing value for money and good customer outcomes.
Regular cash warnings – the rules
The second part of the new rules is for providers to warn customers if they have a significant amount invested in cash over a period of time.
The idea is to nudge the customer into reviewing their investments.
Providers will have to assess customers once every three months to establish if:
- they have more than £10,000 in cash;
- this is more than 25 per cent of their non-workplace pension;
- this was the case in any other assessments carried out during the previous six months; and
- the customer is more than five years away from the normal minimum pension age (NMPA) or a lower protected age.
Providers have leeway when exactly they will conduct an assessment within this three-month period – it does not have to be on a particular date.
