In December 2022, the Financial Conduct Authority (FCA) released a Policy Statement entitled: “Improving Outcomes in Non-Workplace Pensions."

FCA Policy Statements always make you sit up in your chair a bit straighter. It's their way of saying, “this is what we want you to do – and this is when you have to do it by”.

For this particular Policy Statement, the two things they wanted pension providers to do were:

• Offer non-advised customers purchasing a non-workplace pension (NWP) a ready-made, standardised investment solution (a ‘default option’) and make this available alongside other investment options; and
• To issue ‘cash warnings’ to members with “…significant and sustained levels of cash in their NWP”, to warn them that their pension savings are at risk of being eroded by inflation.

The implementation date for both requirements was 1st December 2023.

Having initially focused on the charges and investment options prevailing within workplace pensions, following the roll-out of auto-enrolment, the FCA then turned their attention to firms operating non-workplace pensions, which includes self-invested personal pension (SIPP) providers. But what do these requirements mean in practice for SIPP providers and their customers?

For workplace pension schemes, contributions for employees are typically placed into default arrangements that invest the money into a balanced or cautiously managed fund, although an employee could override this and proactively select other funds from those available. With SIPPs or personal pension plans, however, an investor would not have been offered a default option.

From this month, therefore, most SIPP and personal pension providers will have to offer a default accumulation investment fund to their non-advised consumers, which must be appropriate for the target market.

The default option must be prominently offered when a consumer first opens and funds a pension and at other times when they are presented with a list of investments to choose from.

Importantly, however, the consumer is under no compulsion to choose the default option being offered; they can select whichever investments they want.

I should think so, too. The clue lies within the name of the pension product – “self-invested”. As with the four ‘investment pathways’ that were introduced in 2020 for non-advised SIPP members going into drawdown, I can see this new default accumulation fund requirement becoming another ‘white elephant’, despite the time and expense incurred by SIPP providers, having to incorporate it into their product proposition.

The FCA has also introduced new rules, with the aim of ensuring that individuals in SIPPs and other non-workplace pensions don’t leave too much of their pension fund in cash.

This follows their identification of 10 million British pension savers with at least £10,000 sat mostly in cash; thereby exposing those funds to potential erosion in real terms over time, because of the effects of inflation.

The SIPP provider must now issue a ‘warning letter’, highlighting the impact of inflation to both advised and non-advised members that hold 25% or more of their pension in cash, or cash-like investments, for more than six months.

Providers must determine the proportion invested in cash by each member at least once every three months, and these cash warnings will have to be issued every 12 months, up to 5 years before the prevailing normal minimum pension age, if the exposure to cash remains.

Bearing in mind that the FCA Policy Statement was originally issued when inflation was in double-digits, and interest rates currently available on cash investments may exceed the prevailing inflation rate, the ‘warning’ delivered to SIPP members is arguably less acute now.

In addition, SIPP members may have perfectly good reasons for holding more than 25% of their fund in cash; for example, in anticipation of a commercial property or land purchase.

In the long term, the FCA’s basic message regarding the effects of inflation holds good, but it would be helpful if the rules around issuing warning messages to SIPP members could offer the provider some flexibility, where there are genuine reasons for holding a significant amount of cash in their SIPP at the point of calculation.

James Jones-Tinsley is a technical specialist at Barnett Waddingham on SSAS and SIPPs practice areas. He also presents to clients, advisers and other professionals on pension matters, liaising with the media on changes to pension legislation. James D Jones-Tinsley FPMI APFS, This email address is being protected from spambots. You need JavaScript enabled to view it.