Repeating the ‘stronger nudge’

I was recently asked a query concerning a scheme whose provider is regulated by the Financial Conduct Authority (FCA).

The question concerned a member who has previously designated all of his funds as available for flexi-access drawdown and is intending to take occasional withdrawals of income from those funds.

The issue concerned whether, under the FCA’s ‘stronger nudge’ requirements, the provider is required to repeat the ‘stronger nudge’ each time the member requests some income.

By way of background here, since 1 June 2022, occupational schemes have been required to refer certain members and beneficiaries with rights to flexible benefits under the scheme to appropriate pensions guidance, provided by Pension Wise, where the trustees receive an application, or a communication in respect of an application, in respect of a relevant beneficiary to:

a) transfer any rights to flexible benefits the relevant beneficiary has accrued under the scheme, or

b) to start receiving flexible benefits under the scheme.

This is generally referred to as the ‘stronger nudge’.

From 1 June 2022, schemes that are regulated by the FCA are also required to?provide a ‘stronger nudge’ to certain retail clients who have decided, in principle, to:

a) access their pension savings using a pension decumulation product; or

b) transfer rights accrued under their existing pension scheme to another pension scheme for the purpose of accessing their pension savings using a decumulation product.

A ‘pension decumulation product’ here includes a drawdown pension.

Although the requirements that apply to occupational schemes are similar to those that apply for FCA regulated providers are similar, there are some differences.

To address the question of whether or not the provider is required to repeat the ‘stronger nudge’ each time the member requests some income from their flexi-access drawdown fund, we need to look at the FCA’s Policy Statement PS 21/21, which introduced the FCA’s final rules and guidance on this area.

Paragraph 2.27 of PS 21/21 outlined the FCA’s original intentions on this area as follows:

Where a consumer returns to access their pension savings [which would appear to include ‘coming back’ to take a further element of income from a drawdown fund], having been nudged and confirmed they have received guidance, we proposed that providers do not need to nudge the consumer again, unless circumstances have changed, and it appears on reasonable grounds that they could benefit from receiving guidance again. This allows providers to use their judgement about when it might be appropriate to repeat the nudge.

The feedback that the FCA received on this original proposal is summarised in paragraph 2.29 of PS 21/21 as follows:

Some respondents suggested it would be difficult to make this assessment without the risk of straying into assessing a consumer’s personal circumstances or providing advice.

In recognition of this, the FCA clarified their intentions:

… we have taken on board the feedback and made some changes to our final rules to clarify this intent. Providers are only required to re-nudge when they are aware or have been made aware [the FCA’s emphasis] by the consumer of significant changes in circumstances since they last received the guidance. In such circumstances, providers must re?nudge where it appears to the provider on reasonable grounds that the consumer may benefit from a repeat of the guidance in order to evaluate the different options available to them in the context of their current circumstances. We do not expect providers to assess or probe consumers about changes in their personal circumstances unless they are made aware of such changes by the consumer.

The FCA further explained that:

Our approach on re?nudging is similar to the approach we have taken in relation to the delivery of the retirement risk warnings, where providers may use judgement to determine whether the retirement risk warnings are still appropriate. We had considered requiring providers to explain the benefits of receiving guidance again where they are not made aware of changes in circumstances, but we do not think this would be proportionate.

From the above, we were able to conclude that, in the circumstances of this case, the provider is only required to repeat the ‘stronger nudge’ where they are aware that the individual’s circumstances have changed significantly since the earlier ‘strong nudge’ requirements applied. Further, the provider is not required to actively investigate whether or not these circumstances have changed, although they would need to consider any new information provided to them by the individual.

Aries Insight?provides comprehensive and detailed guidance on the application of the ‘stronger nudge’ requirements for both occupational schemes and FCA regulated providers, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.?If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.