The rules applicable from 1 October 2020 require that advisers must consider using any available workplace pension as the destination for transfer and discount this in favour of an alternative personal pension ONLY IF that alternative can be demonstrated to be MORE suitable than the workplace pension. The relevant Policy Statement (PS20/06) and the related guidance notes (GC20/01) tend to use the term ‘workplace pension’ whereas the applicable rules refer to ‘qualifying scheme’. These refer to the same thing.
The definition of ‘qualifying scheme’ can be summarised as:
“a personal pension scheme or stakeholder pension scheme, which provides money purchase benefits, used by an employer(s) to comply with duties imposed in Part 1, Chapter 1 of the Pensions Act 2008. In summary, these duties are to take necessary steps for particular employees, by a particular time, to make those employees members of a pension scheme which meets the criteria in that Act and in regulations made under that Act …( but such a scheme will not be a qualifying scheme if the only members of that scheme are directors or former directors of the same employer, including at least one third of the current directors of that employer)”
It is noteworthy that the obligation to consider a workplace pension only applies to money purchase/defined continuation arrangements. In principle, consideration should also be given to any available defined benefit scheme but there are fewer and fewer of those available to new members, never mind transfers in, and experience indicates that transfer in terms are unlikely to be attractive. In any case, most transfers are driven by a desire to access benefits in a manner not offered by a defined benefit scheme.
The suitability rules/guidance can be found in COBS 19.1.6, in particular item (7), which states:
“Where a qualifying scheme is available to the retail client, a firm considering making a personal recommendation to effect a pension transfer to a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme:
(a) should start by assuming that it will not be as suitable as a transfer to the default arrangement of an available qualifying scheme; and
(b) will need to be able to demonstrate clearly that, as at the time of the personal recommendation, it is more suitable than a transfer to the default arrangement of an available qualifying scheme.”
Discounting use of a qualifying scheme
To demonstrate that an alternative arrangement might be more suitable than an available qualifying scheme, one or more of the following considerations is relevant:
- the retail client provides evidence of experience at making active investment choices as a self-investor or as an advised investor (except in relation to investments in the default arrangement of a qualifying scheme or in a mortgage endowment policy or similar product);
- where the retail client wishes to access the funds within 12 months of entering into pension decumulation and the qualifying scheme does not offer the retail client a decumulation option that would enable the retail client to achieve their desired outcome.
However, in considering these, as well as any other relevant factors that might support discounting use of a qualifying scheme, it is necessary to show:
- that those considerations are sufficiently important to the client as to outweigh other considerations in favour of the default arrangement of the available qualifying scheme; and
- why the outcome sought by transferring to a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme cannot be achieved by transferring to the qualifying scheme.
Reasons for discounting that are unlikely to be sufficient
The presence of one or more of the following circumstances should not be taken as sufficient to discount use of the qualifying scheme:
- one of the client’s objectives is to have access to a wider range of investment options than available under the default arrangement of the qualifying scheme
- the transfer is to take place more than 12 months before the retail client enters into pension decumulation; and/or
- the client will enter into pension decumulation within the next 12 months, but the client has not yet decided whether or how they will access their funds;
- the qualifying scheme will not facilitate adviser charging