The government has finalised its plans for a change in the law that would require pension schemes to give a “stronger nudge” to their members towards free pensions advice. It is hoped that this will avoid members’ susceptibility to pension liberation scams and improve their returns by informing better choices. This change, announced on 17 January 2022, is due to take effect in June 2022 and will require pension schemes to put in place new processes, triggered by their members requesting changes, or access, to their pensions.

Pension Liberation Scams

Pension liberation scams operate by scammers stealing all or part of member’s pension by persuading them to access their pension pots. These scams have been growing year on year for the last 15 years. During Covid-19, many pension scheme members have been more eager to make changes to maximise their pension returns post pandemic, which has left them more vulnerable to scammers. Owing to the large sums of money lost by members caught by scams close to their retirement, the government set up PensionWise (a free government guidance service) in 2015 to advise pension scheme members to make better choices to maximise pension savings, and to help them avoid scams. Following behavioral trials done by the Money and Pension Service which revealed that pension scheme members were more likely to use PensionWise if they received a stronger nudge, the government decided to make the stronger nudge a legal requirement, which it has done through these new regulations.

New Regulations – the Stronger Nudge

The new regulations will require trustees and managers of occupational pension schemes to provide the stronger nudge when triggered by certain actions taken by members. Whenever a member who is over the age of 50 asks to receive flexible benefits or make a transfer of their pension pot or any part of it (regardless of whether that request was in the form of communications sent to the trustees or managers, or a formal application) the stronger nudge is triggered. The stronger nudge is not triggered if the transfer is for the purpose of consolidating benefits into one scheme, rather than accessing them flexibly.

Once the stronger nudge is triggered, the trustees and managers must direct members to PensionWise and must take steps to book an appointment for the member with the service. The member’s attempt to access or transfer their benefits cannot be completed until either an appointment has been booked and attended (this can mean booking subsequent appointments if the first is missed) or the member has opted out of this service by the member giving an opt-out notification to the trustees or managers. Trustees and managers can rely on members to confirm whether they attended their PensionWise appointment or received the guidance.

The opt-out notice must be provided by trustees or managers separately to the information about PensionWise. If the PensionWise referral information is sent to the member by post, the opt-out notification form must be separate, and if being done online, must form part of a separate email communication.

Post-Consultation Changes

The Department for Work and Pensions first consulted on its draft regulations in July 2021 and a lot of consultation responses were addressed in the final regulations.

In light of responses noting that schemes having to set up PensionWise appointments for members would incur significant costs for schemes, the final regulations allow for trustees or managers to give members the PensionWise phone number and instructions on how to book an appointment, when communicating with them online or via post.

Several consultation responses highlighted the stronger nudge as a potential barrier to members consolidating their pensions, which the government is keen to encourage, so the final regulations were updated with an exception for applications to transfer for the purposes of consolidation.

Some consultation responses noted that trustees and managers of both transferring and receiving schemes would be triggered to provide the stronger nudge to PensionWise when members were transferring benefits. The final regulations amended this, allowing the nudge to be avoided if the other scheme had already delivered it.

One expected change that was not made, despite consultation responses regarding this, was highlighted by the Pensions and Lifetime Savings Association. Members with small pots of £1,000 and under are not exempt from the stronger nudge even though their speaking to PensionWise would likely not be beneficial or cost effective. The PLSA says that this may get in the way of automatic small pots solutions which are better placed to help those members.

What action needs to be taken?

Trustees and managers of pension schemes will have to comply with the requirements in the new regulations from June 2022. They will need to start changing their member engagement processes now to ensure that the appropriate systems to recognise the trigger and deliver the appropriate stronger nudge communications are in place. In addition, trustees and managers will also be required to keep a record of members who have received the stronger nudge, those that have confirmed that they have attended the PensionWise appointment or received the guidance, and those who have opted out of the stronger nudge. Guidance from the Pensions Regulator is expected in the coming months, but trustees and managers cannot wait for the guidance before starting preparation.

While some schemes will be able to embed the PensionWise booking form into their online platform, and trustees and managers will not always need to book members’ appointments for them, new protocols will have to be put in place to contact members, often book appointments for them, and to keep a record of their progress with PensionWise. As a result, increased pension scheme administration costs are likely, and employers will need to prepare for this.

The Financial Conduct Authority is putting in place a similar set of requirements for non-occupational pension schemes. There are differences in the two sets of requirements, as highlighted during the initial consultation. Trustees and managers of occupational pension schemes may need to familiarise themselves with both sets of requirements when dealing with transfers between the two types of pension scheme.

Read Danyal’s article in Thomson Reuters Regulatory Intelligence.