Additional “second line of defence” requirements for DC pension schemes

The government has announced that the “second line of defence” protections will apply to both contract-based and trust-based DC arrangements.

10th February 2015

Pension flexibility requirements for defined contribution schemes continue to change as the Pension Schemes Bill works its way through the House of Lords.

Schemes and employers already grappling with the headline changes are now awaiting clarity on the detail around additional protection for consumers. The protections are to be introduced for contract-based arrangements through FCA rules while the government has now announced that it intends to extend the protections to trust-based schemes.

In January this year, the FCA announced that from April 2015 pension providers will be required to:

  • ask customers about key aspects of their circumstances relating to the choice that they are making;
  • give relevant risk warnings in response to answers from the customer; and
  • highlight the importance of the Pensions Wise guidance service and/or regulated advice.

These further requirements, known as the “second line of defence”, will be in addition to the requirements to remind customers of the availability of the guidance service and how to access it and to describe the tax implications where a customer plans to access cash from their pension pot. The FCA intends setting out these further requirements in new rules but is looking initially to bring them into force on a temporary basis from 6 April 2015.

The government has since confirmed that similar protections will be extended to protect members in trust-based schemes and announced that the DWP and the Pensions Regulator are working together on how best to achieve this. The intention is for trust-based schemes to keep to the April 2015 timetable so that everybody is working on the same basis.

Detail is awaited on how the “second line of defence” will work in practice and how comprehensive it will be.  With the new regime less than two months away, trustees and administrators will be keen to get this information in order to ascertain what they should be covering and how this new obligation will sit with their existing duties towards members.  We will keep you updated when further information becomes available.