December 2024
On 8 December 2024, the FCA announced plans to end the binary position for customers when making pension decisions of either relying on factual information or obtaining regulated advice. A new proposed regime Targeted Support gives a middle ground option allowing firms to better indicate and ‘nudge’ suggested actions for clients to consider. This paper covers pension accumulation and decumulation products – although another consultation for retail investments will follow in H1 2025.
The FCA is also separately seeking views on whether more changes might be needed to better support pension consumers on (i) the use of projections, tools and models, (ii) enhancing expectations on the consolidation of pension pots and (iii) creating a more robust and prescriptive framework for operating SIPPs.
At a glance
The Proposal
Firms can provide more tailored and directional messaging to help customers make better informed pension decisions leading to improved retirement outcomes.
The Opportunity
Firms can provide specific interventions to help consumers get better pension outcomes and develop commercial opportunities to drive increased investing.
The Risks
It will require high data accuracy, robust controls and oversight, regular monitoring, It will also create a need for a robust audit trail and rigorous management of conflicts of interest.
KPMG’s initial insights
The paper will be well received. It will enable firms to provide more support to customers when making complex choices which will improve their retirement outcomes. This will also create commercial opportunities for the firm (by targeting increased pensions savings, diversification of fund solutions away from defaults or identifying alternate retirement solutions).
However, it creates an inherent conflict of interest that firms will need to manage to ensure they are effectively balancing their own commercial interests with good customer outcomes. The obligations in relation to pre-defining scenarios and consumer segments will require careful consideration. Firms will also need to ensure they have right balance (and accuracy) of data to allow them to correctly verify if the solution will meet the firm’s self-generated definition of a ‘better outcome’.
What’s the FCA ambition?
How could the regime work in practice?
The proposed regime is designed to empower customers to make more informed decisions – leading to better outcomes. Therefore, the link to Consumer Duty is clear and Consumer Duty fundamentally underpins Targeted Support. Indeed, many firms have experienced frustrations at following through on fully aligning to the Duty for fear of overstepping into inadvertently giving regulated advice.
Targeted Support is not intended as a replacement for regulated advice and is intended to be complementary – either helping those unwilling (or unable) to pay for advice to make an informed decision or act as a conduit for those with complex needs to identify their need for regulated advice. Although symbiotic, the paper highlights the risk of customers misunderstanding Targeted Support as advice.
Commentary | |
Better outcomes concept | Targeted Support introduces a new concept of better outcomes. Firms will need to have reasonable grounds for believing that the delivery of targeted support suggestions would deliver a better outcome for their customers than if targeted support was not provided. |
Types of support | Firms can provide Targeted Support to new customers as well as support existing customers with both accumulation and decumulation decisions. The FCA will not prescribe the scenarios that can be developed for Targeted Support. |
Understanding the customer | Operates on a consumer segment (akin to a target market) level to make suggestions based on ‘consumers with common circumstances’ and therefore the solution, limited suite of data, customer verification and associated regulatory burden will be lower than for simplified and holistic advice. |
Consumer Segments | No limit to number of segments that firms can develop but they much be sufficiently granular with associated data points. Too little prescription and it is more challenging to evidence a ‘better outcome’ but too much prescription and it risks becoming an implicit recommendation. |
Range of solutions | FCA will give firms freedom to define their own ready-made solutions. Firms can suggest a single new product the customer could choose based on ‘people in your circumstances’. This option would narrow the choice significantly for the customer. |
Verification | Firms will need to check that customers align with the common characteristics of the consumer segment (and therefore the ready-made solution is appropriate). This process will include validating that the data used is correct and up to date. |
Fees and charges | Firms will be able to cross subsidise. from other services or products provided by the firm as part of their broader proposition. Firms will not have to charge for Targeted Support but equally no commission can be paid or received either. |
Basis of provision | FCA wants Targeted Support to operate on an opt-out basis. It is liaising with ICO to assess impact. FCA is also seeking views on whether the provision of Targeted Support by pension providers should be mandatory. |
Exclusions | Due to risk of confusion, FCA’s view is that advice firms should not offer Targeted Support to its advised customers – and neither should pension providers. The outcomes of any Targeted Support cannot suggest a specific annuity. It can only indicate an annuity as a ‘method of access’. |
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Disclosure | Firms need to deliver effective (and detailed disclosure) to ensure consumer understanding of the service provision (and its limitations). Aligned to the Duty, the FCA is currently reluctant to mandate the disclosure of Targeted Support, but it does recognise that some standardisation may be necessary. |
Permissions | FCA is still undecided whether Targeted Support will require new regulatory permissions. However, regardless the intention is for Targeted Support to fall within the remit of both FOS and FSCS. |
Oversight | Not a ‘set and forget’ process. Firms are expected to adapt and refine segments and solutions as new scenarios and groups emerge (especially in relation to customers with indicators of vulnerability). As a minimum, firms must review annually. |
Record Keeping | Firms will be required to keep copies of all communication and interactions to evidence the key messages and features delivered as well as the outcomes being delivered. |
What are the key opportunities?
How will firms seek to embrace Targeted Support?
Firms will recognise that there are a significant number of opportunities that the new Targeted Support regime will generate. These can not only improve customer outcomes but also generate commercial benefits for the firm. It can allow firms to increase customer loyalty, gain incremental revenue from increased contributions, amended retirement age or alternate fund choices as well as attract new pension savers.
The associated inherent conflict of interest will need to be carefully managed but Targeted Support, when done right, offers an exciting opportunity for firms to embrace.
- Support customers with uncertainty about how to take a retirement income
- Encourage existing savers with surplus cash holdings (but no pension provision) to consider planning for their retirement via a new personal pension.
- Nudge customers with a high withdrawal rate within drawdown to consider the consequences and risk of running out of money and suggest a more appropriate withdrawal rate.
- Highlight to existing pension customers the benefits of making increased pension contributions to a specific percentage of earnings and the impact it can have on retirement benefits.
- Nudge pension customers invested into the default fund to make a more proactive and informed decision about their investment preference and time horizons towards a more appropriate investment solution.
- Raise awareness to customers approaching selected retirement age but still heavily invested in equities to choose an alternative less volatile solution and/or opt into an appropriate investment pathway/lifestyle profile.
- Engage with existing pension savers to highlight option to consolidate other existing pensions into firm’s scheme.
- Provide support at retirement to guide customers to withdraw cash in a tax efficient manner.
- Encourage pension savers in low risk/cash-like funds, undiversified asset allocation, poorly performing or expensive or solely in high-risk funds to take an informed approach to an appropriate level of risk and/or alternate fund choice.
- Educate customers into making an informed decision in relation to an appropriate retirement age.
What are the key risks?
What are key risks that firms will need to mitigate to make Targeted Support a success?
- Double the boundaries to worry about. Firms will now need to ensure that information and guidance does not stray into targeted support and that targeted support does not stray into advice. Given the more subjective nature of targeted support (versus advice) this added complexity may mean that firms stop short of what targeted support permits them to do – thereby reducing its effectiveness.
- Unintended consequences? The FCA has highlighted concerns about Targeted Support creating misunderstanding for advised customers. There is a risk that this may adversely impact vertically integrated firms – especially where they have a single brand.
- Evidential bar for better outcomes? Although expected by the FCA, it will represent a significant challenge for firms to evidence the delivery of better outcomes even if the customer did not act on the Targeted Support.
- Seeking the ‘Goldilocks’ of data. Firms will need to finely balance in the level of data they use – too little and it will not be able to evidence better outcomes but using too much risks straying into advice.
- Uneven playing field? Give the exclusion of customer buying a specific annuity via Targeted Support, it creates an uneven playing field and may lead to more Targeted Support towards drawdown contracts. That said, given the high complexity and elements of irreversibility, could the risk of poor outcomes exceed a firm’s risk appetite to offer Targeted Support?
- Not having a broader scope will likely impact use. Not expanding the scope of the regime to cover all other retail products (e.g. insurance and mortgages) is a missed opportunity as it will hamper some firms offering as holistic a service as they could. Targeted Support by its design is also product focussed when many of the right outcomes may not be.
- Tantamount to advice? Despite the new proposals, given the personalisation taking place and the ability for firms to offer a single solution (currently both within perimeter guidance as indicators of advice) there will need to be clearer demarcation from advice. This will help firms, FCA and FOS alike.
- Greater risk consideration needed for new sales. Firms will need to recognise and address the multiple different risk considerations (especially given the lack of upfront customer data) of seeking sales with new customers versus serving existing customers with targeted support. The former will require significantly more consideration.
- Firms will need to avoid judgment. Where the Targeted Support is being delivered in real time, (especially with a decision tree model via chat or telephone) firms will need to avoid providing judgement. To manage the risk of straying into advice, targeted support will need to be driven purely by client choice.
- Need for digitalisation may adversely impact those with vulnerabilities. To be as effective as possible targeted support should be support by open finance and operate on a digital first basis. However, both factors risk poorer outcomes for customers with vulnerable characteristics. Firms will need to be vigilant that any targeted solution does not disadvantage vulnerable customers and that they receive the same outcomes as other customers
What support can KPMG in the UK offer firms?
KPMG in the UK has significant experience designing/delivering and reviewing advised and non-advised propositions and customer journeys.
We have also worked extensively on supporting firms implement and embed the Consumer Duty.
More specifically, we can assist with:
- Strategy and Business Model – helping firms focus on big picture opportunities.
- Regulatory expertise – supporting firms with pragmatic and insight-led insights ensuring appropriate balance between commercial imperatives and good customer outcomes.
- Customer – maximising customer-centricity through segmentation, behavioural economics, journey mapping and voice of customer insights.
- Competition Economics – analysis of market data to inform opportunities.
- Technology and tooling – embracing digital, automation and AI to implement efficiently and effectively.
- Legal Services – provision of expert legal advice by KPMG Law in the UK* and guidance to provide certainty in relation to regulatory compliance.
