Across the pensions industry, most DC developments are introduced in an even-handed way, with occupational and contract-based pension schemes receiving similar levels of scrutiny. For example, the
new value for money requirements are expected to apply in a similar way to both kinds of pension arrangement.
But it may be tricky to maintain this when dealing with individuals who are making important decisions at a point in their lives when they are vulnerable. That is because the Financial Conduct Authority and The Pensions Regulator have different approaches to dealing with this issue.
There is no legal definition of vulnerability. The FCA defines it as: “Someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.” Vulnerability can therefore be related to an individual’s health, life events (such as bereavement or relationship breakdown), resilience and capability such as low confidence in managing money. In May 2022,
47 per cent of UK adults were shown to exhibit one or more characteristics of vulnerability, so we can expect this to be a common occurrence for many people at some stage in their lifetime.
The introduction of policies such as the FCA’s Consumer Duty and the output of the Advice/Guidance Boundary Review are expected to require pension firms to have a good understanding of their customers, and to offer pension products that are tailored to suit different types of people with different needs. This framework could be crucial when dealing with those who are more vulnerable and therefore at a greater risk of harm when making retirement decisions.
In contrast, there are currently very few references to vulnerability and how it should be taken into account within the legislation and guidance directed at occupationalpension schemes. Yet failure to consider a member’s vulnerability could be far-reaching. It could lead to poor decisions, and poor retirement outcomes, undermining all the good work that has been done up to that point. Unhappy members and formal complaints could follow. There could also be reputational risk for trustees (including professional trustees), providers and administrators to take into account. This perhaps explains why scheme administrators have been starting to prioritise this topic in recent years — according to a 2024 report from The Pensions Regulator, 81 per cent of administrators now have clear policies in place on saver vulnerability.
Data protection also comes into focus here. Administrators and schemes might consider recording information on the needs of vulnerable members in order to offer tailored support, or running an exercise to identify the proportion of membership who might be categorised as vulnerable. In doing so, trustees will need to ensure they comply with data protection legislation. This includes having a lawful basis for processing such data.
The FCA recognises the need to share key data on vulnerability with others. The question is how that might translate to occupational pension scheme trustees and their third party service providers. The DC retirement process, for example, can often involve a chain of people who need access to an individual’s data, raising questions about what kind of data should be shared, with who, and whether the member should have any say about it. The storing and processing of data of someone who is vulnerable is likely to give rise to additional challenges and risks for pension schemes.
It is too early to know whether the new trustee duty to provide support in retirement, expected in the upcoming Pension Schemes Bill, will require trustees to consider vulnerable members in occupational pension schemes. But that could be one way of levelling the playing field between different kinds of pension arrangements.
As the industry continues to develop, we should all be mindful of the differences between the regulatory landscape for FCA-regulated firms and occupational pension schemes. Yet when it comes to dealing with vulnerability, it is important to ensure all members receive the support that they need, whatever type of scheme that they belong to.
