Pension schemes should beware the 'risk of inaction' around member advice, warn Eversheds Sutherland and LCP

Eversheds Sutherland and LCP, a leading independent, owner managed pensions, investment and insurance consultancy in the UK and Ireland, have warned that trustees and sponsors of Defined Benefit (DB) schemes should not see FCA rules as a barrier to providing support to members on their pension options. There is also a risk in inaction, potentially where it leads to poorer member outcomes.

The FCA published a consultation document last year which suggested that schemes which provide information about alternatives to scheme benefits, such as transfers or drawdown investment, may be going too far. In response to feedback that this was making trustees and sponsors wary about providing help, the Pensions Regulator (TPR) and the FCA published a joint document in March 2021 to clarify how employers and trustees can provide members with support in making choices about their options within or outside their pension scheme.

In a joint blog, LCP’s Jonathan Camfield and Charlotte Cartwright, a Legal Director in Eversheds Sutherland’s pensions team, unpick the details around what the rules say and how schemes can help support members, following on from a joint event held with LCP, Eversheds Sutherland, and the FCA.

They stress the benefits in members being armed with the right information against the backdrop of considerable flexibility around options available, alongside the introduction of pension freedom and choice.

Key points raised are:

• There is no barrier to schemes providing factual information about member rights and options within the scheme. Schemes can also provide unsolicited Cash Equivalent Transfer Values (CETVs), provided they have considered whether this is likely to result in good outcomes for members, and should provide appropriate context for this information;

• Whilst there are legal risks to trustees in supporting members in making decisions, especially around a member’s desire to consider transferring out of the scheme, there are also risks of inaction, as this may increase the risk of poor member outcomes;

• A growing number of schemes make one or more firms of Independent Financial Advisers (IFAs) available to members to provide advice on scheme benefits and the pros and cons of transfers. There are various structural/legal points that need to be factored into these projects. From an FCA perspective, it is important that an IFA firm should be “whole of market” as they will have to be able to provide advice on a range of pension products.

Charlotte Cartwright, Eversheds Sutherland, said:

“There are pros and cons to schemes appointing IFAs, and risk both in doing so and in doing nothing. This means it’s important for trustees to take an active decision about whether to get involved in this area. For example, this could involve putting it on trustee meeting agendas for consideration, and properly understanding the legal/structural risks of both action and inaction before taking a decision, based on their scheme’s circumstances.

“The role that IFA’s can play is becoming increasingly important and more schemes are making them available to members. Where IFAs are appointed, as part of managing risk, schemes need to have plans in place not just for initial due diligence but also to ensure that the quality of advice is maintained on an ongoing basis.”

Jonathan Camfield, Partner at LCP, said:

“Most trustees and corporate sponsors want to do their best to help members make the right decisions, but some may feel nervous that they will be exposed to legal risk if they offer further support.

“However, there is also clearly a risk in inaction and that’s why it’s important for schemes to understand that there is no barrier to them providing factual information around members options within the scheme. Thinking about how they can help their members make better decisions by helping them access high quality, impartial financial advice where appropriate will give them peace of mind that they are helping members and the new FCA rules support this direction of travel.”