Nudge, nudge, what next? A look at what trustees need to do to comply with the stronger nudge requirements

• United Kingdom

• Pensions

22-03-2022

Summary

On 1 June 2022, new requirements will come into force which will require trustees to direct members with DC and cash balance benefits to guidance from Pension Wise when they apply to access their benefits, or, where they are over 50, to transfer them. Similar requirements will apply to personal pension schemes. 

Trustees will need to offer to book an appointment with Pension Wise and explain that they cannot proceed with the member’s application unless they have received the appropriate guidance or opted out of doing so. There are also requirements around the form that any opt out will need to take. 

Trustees and administrators will need to update their process around transfers (again) and retirement and ensure that communications reflect the new requirements. They will also need to ensure that they factor in sufficient time to comply with these requirements in both retirement and transfer processes.

What will trustees need to do?

When will the new requirements apply? The stronger nudge requirements will apply to applications and communications about transferring or accessing flexible benefits made on or after 1 June 2022 by a “relevant beneficiary” (a member or a beneficiary entitled to benefits on the death of a member).  “Flexible benefits” for these purposes are generally DC or cash balance benefits.  

The requirements will not apply to an application for a transfer where:

• a relevant beneficiary is under age 50

• receiving flexible benefits is not one of the purposes of the application – the new requirements are not designed to stop beneficiaries consolidating their benefits

• the relevant beneficiary confirms they have already received or opted out of receiving the guidance in relation to a different scheme or

• the relevant beneficiary is transferring to a personal pension or stakeholder scheme which is subject to FCA regulation and alternative requirements to nudge members towards guidance

Referring beneficiaries to Pension Wise: Where the stronger nudge requirements apply, if a relevant beneficiary contacts trustees about making an application to access or transfer flexible benefits, trustees will need to:

• offer to book a Pension Wise appointment at a time and of a kind suitable for the relevant beneficiary and, if this offer is accepted, take reasonable steps to book the appointment

• provide information about how to book a pensions guidance appointment where the relevant beneficiary does not accept their offer to book an appointment or they have been unable to book a suitable one

• provide an explanation that they cannot proceed with the application unless the relevant beneficiary tells them they have received the Pension Wise guidance or opted out of receiving it and

• provide an explanation of how to opt out

Revised guidance from the Pensions Regulator on communicating with DC members says that it is “good practice to offer to book a Pension Wise appointment as early as possible in the process” and that “trustees may wish to consider encouraging members to take some time to fully consider their decision before confirming that they wish to opt out”.

Opting-out: Where a relevant beneficiary does not want to receive guidance, they will need to opt-out. In most cases the opt-out will need to be in a communication which is solely for the purpose of opting out.  However, the communication can be a phone call, online form or a piece of paper.  

In some cases, a separate opt-out will not be required – so the beneficiary can opt out at the same time they are told about the nudge or on a form that deals with other material. This is the case where a relevant beneficiary:

• has received the Pensions Wise guidance or regulated advice in the past 12 months

• is transferring their flexible benefits under the scheme (which means that transfer forms could contain an option for a member to confirm they have attended a Pension Wise appointment, or they want to opt out) or

• wants to access their benefits as a serious ill health lump sum

What happens next? Trustees cannot proceed with an application until a beneficiary has opted-out or confirmed that they have received appropriate guidance. The form of confirmation required is flexible - the Government’s response to consultation says trustees “do not need further evidence, beyond the verbal or written confirmation of the beneficiary”. Where the required confirmation or opt-out is not provided, the 6 month time limit for transferring money purchase benefits will not apply.

Trustees will need to keep records of whether a beneficiary has either received Pension Wise guidance or opted-out. 

Overlap with other advice requirements: The stronger nudge requirements overlap with other statutory requirements for members to get advice. 

Under the new transfer conditions launched in November last year, trustees must consider whether there are any red or amber flags suggesting a pensions scam. If there are amber flags, the member must receive advice from MoneyHelper before the transfer can proceed. The Government acknowledged in the initial stronger nudge consultation that it would be possible for members to “be directed to [the Money and Pensions Service] for a scams appointment and a Pension Wise appointment within the same transaction”. Options were considered to avoid this but the Government concluded that trustees should have the “freedom to consider how they can appropriately explain the two guidance appointments to the member”. 

Where a member has DB and DC rights there may also be an overlap with the statutory requirement in relation to DB benefits to obtain independent advice where a transfer is £30,000 or more. 

Finally, the retirement wake-up packs that trustees need to send to DC members to help them with their retirement options also refer members to Pension Wise. If a wake-up pack is sent following a communication from the member, a stronger nudge may also be required. In this case, the material in the wake-up pack referring members to Pension Wise guidance can generally be left out.

Next steps

Before June this year, trustees and administrators need to:

• consider how and where to incorporate the stronger nudge requirements into their transfers and retirement processes

• put processes in place to identify when the stronger nudge needs to be given

• ensure that communications are updated where necessary to refer to the stronger nudge requirements

• allow sufficient time in processes for beneficiaries to receive and consider guidance and

• put processes in place to ensure appropriate records are kept

The new nudge processes are deceptively complex and - particularly because they need to be layered with other existing advice requirements – it is important to leave enough time to get ready.