Opt-out and permissions

A change is as good as a rest they say. So here is a compliance related article that does not have any connection with Consumer Duty!


We recently received a query from a firm which purported to be in relation to what permissions are needed in connection with a client opting out from an occupational pension scheme, group personal pension scheme or group stakeholder pension scheme to which the client’s employer contributes and of which the client is a member.

On closer inspection, the situation in question was not actually related directly to a current opt-out. The actual scenario was that the firm had a client who had opted out of his workplace scheme some years ago. In the interim, the client has been funding a personal pension, with the employer happy to pay a workplace-equivalent level of contribution.

The client has now approached the firm for advice on making an additional personal contribution.

In the meantime, the firm had varied its permissions so as to move from full pension transfer permissions to the usual limited permission as is described below.

Just to be absolutely clear, it is the client who decided to opt out of the workplace scheme. The firm has merely been asked to provide a recommendation on the additional contribution.

Compliance obstacle?

The firm had approached ATEB because their usual external compliance people told the firm that they could not continue to advise this individual without full pension transfer permissions. They even provided a flow chart to ‘prove’ this was the case. ATEB were asked to provide a sense check on the matter.

Compliance no obstacle!

Following a detailed analysis of the relevant rules we advised the firm as follows.

Overall, our conclusion was that the other compliance advice was simply wrong and that the very confusing flowchart did not actually support the conclusion.

The client had already opted out and therefore has a DC personal pension which his employer merely happens to contribute to. It is nonetheless a personal pension owned by and for the benefit of the individual. It has no safeguarded benefit so there is no transfer, conversion or opt-out in play now. Accordingly full permission is not required, as per (5) below.

COBS 19.1.-1A

Except where a firm is providing abridged advice (see COBS 19.1A), this section applies to a firm which:

(1) gives advice on pension transfers, pension conversions and pension opt-outs to a retail client; or

(2) arranges pension transfers, pension conversions or pension opt-outs,

in relation to:

(3) a pension transfer;

(4) a pension conversion; or

(5) a pension opt-out from a scheme with safeguarded benefits or potential safeguarded benefits.

And the workplace scheme from which he opted out had no safeguarded benefits or potential safeguarded benefits either. Accordingly, it was very difficult to see why the other compliance adviser would think that this in any way relates to a transfer or requires full permission.

The advice relates to an additional PERSONAL contribution to an existing PERSONAL pension plan. Where is there any requirement for full permission in that? There isn’t!!!

But we persevered! The only glimmer of logic we could find was in the detailed definition of pension opt-out …

a transaction, resulting from the decision of a retail client who is an individual, to: 

(a) opt out of an occupational pension scheme, group personal pension scheme or group stakeholder pension scheme to which his employer contributes and of which he is a member; or

(b) decline to become a member of an occupational pension scheme, group personal pension scheme or group stakeholder pension scheme to which his employer contributes and of which he is eligible to join, or will be eligible to join at the end of a waiting period; in favour of a stakeholder pension scheme or personal pension scheme.”

At a pinch, this could be interpreted that the proposed current transaction (the additional pension contribution) arises out of  the decision to opt-out but here is what FG21/3 has to say.

“A firm also does not need the permission at all for a pension opt-out where there would be no redirection of contributions to an FCA-regulated replacement scheme, e.g. due to lifetime allowance or annual allowance considerations. But you may require the permission if the opt-out is followed by a transfer which effectively connects the pieces of advice together. For example, if a firm nudges a consumer to opt-out in order to get transfer advice.”

So as there was redirection of contributions at the time of opt-out permission would have been needed if the firm had given the advice on the selection of the PPP. But the firm did not advise on the opt out so that is historical and largely academic. The next sentence goes to time frame – i.e. how long after an opt-out does  the concept of ‘resulting from the decision’ apply for? The FG states “you may require the permission if the opt-out is followed by a transfer which effectively connects the pieces of advice together”

First, we noted that this states ‘may require’ not ‘will require’.

Second, the opt-out was not followed at the time by a ‘transfer’ and the current advice does not constitute a transfer so, even if the resulting from was considered to last a lifetime, there is no transfer so no requirement for full permission.

Third, ATEB believed that it would be unreasonable to consider that the opt-out ‘effectively connects the two pieces of advice’ on two grounds.

  1. There are not two pieces of advice which can be connected as none was provided on the opt-out.
  2. The current advice is several years after the opt-out so to argue it results from the opt-out is stretching credulity somewhat.

What happened next?

We duly provided our conclusion that full transfer/opt-out permission was not now required in relation to the advice the client currently needed.

The firm was happy with what we said. However, the other compliance advisers continued to insist that full permission was required. We had no doubt that they were wrong but sought the FCA’s view anyway.

The FCA confirmed ATEB’s view…

“In response to your query, the transaction referenced has already happened so the firm would not be advising on it. Therefore, I don’t see how solely an opt out occurring several years ago which the firm is not advising on would lead to the firm needing DB permissions to advise on a personal pension today. 

The FCA pension policy has stated: 

the definition of a pension opt-out (see here) requires there to be an employer scheme of which the consumer is already a member and receiving an employer contribution. Those conditions are not relevant in the scenario you have described so the advice is not advice on a pension opt-out. It is correct that when preparing a suitability report on a personal pension, the firm must:  

explain why it considers the personal pension scheme, stakeholder pension scheme or FSAVC to be at least as suitable as any facility to make additional contributions to an occupational pension scheme, group personal pension scheme or group stakeholder pension scheme which is available to the retail client; 

However, this requirement in COBS 19.2.2R(2) does not change the investment advice to advice on a pension opt-out. It remains investment advice.”

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

This query relates to a very specific scenario which may not arise very often but we thought it would be welcome relief from the currently ubiquitous Consumer Duty. We would like to think it also shows the care we take in advising firms on compliance related matters. If you are not already an ATEB client, contact us so we can share how we might help your firm.

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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