PS20/06 – part three: Workplace pensions

In part three of this series of articles we will have a first look at the new tighter requirements around consideration of workplace pensions as a target destination when advising on a potential defined benefit pension transfer. You can read our previous articles here:

Part one – contingent charging ban

Part two – abridged advice

 

The rules
With effect from 1 October 2020, when giving pension transfer advice, firms will have to demonstrate why the scheme they recommend is more suitable than the default arrangement in an available Workplace Pension Scheme (WPS). This is a substantively higher test than the ‘at least as suitable’ test that currently applies in COBS 19.2.2.

The new rule states:  

(firms) “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.” 

The rules apply to both independent and restricted firms. The FCA guidance has this to say:

If you offer a restricted range of products or you are independent and use a panel, our rules do not prevent you from recommending a WPS or establishing agency agreements with WPS providers. If you take a commercial decision not to do so, you must not advise clients in cases where a WPS might be the more suitable recommendation.”

A qualifying scheme is defined in the rules as: 

“(a) … 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;

(b) 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; and

(c) (in COBS 9.4.11R, COBS 19.1 and COBS 19.2) in addition to the schemes in (a) as qualified by (b), a defined contribution occupational pension scheme that is a qualifying scheme for the purposes of the Pensions Act 2008.”

The Pensions Act 2008 goes into significantly greater detail but, for most purposes, the above definition should be sufficient to identify any available ‘qualifying’ WPS.

Assessing suitability
In assessing the suitability of any proposed transfer to a personal pension plan the analysis currently required remains mandatory. Firms will also have to include analysis of a transfer into the default arrangement of an available WPS in the APTA process. This analysis will provide the evidence for the suitability report.

Firms only need to consider the most recently joined WPS. Firms can choose to also consider a previous WPS if it would be more appropriate to do so, e.g. if the most recent WPS does not accept additional contributions or if a consumer is not an active member of a WPS at the time, but there is no obligation to do so.

Consideration should of course be given to all the usual client specific factors, but the fact finding and analysis should specifically also take account of:

  • whether the client needs a broad range of complex funds that require ongoing rebalancing, given their risk profile, and knowledge and experience of investing;
  • the proposed product charges compared with those in the capped WPS default arrangement, and how the level of charges could affect the income the client will ultimately receive;
  • whether ongoing advice is necessary, given these points, or whether the client is likely to be better off taking ad hoc advice when needed

Why are the rules being tightened?
The FCA makes no secret of the rationale behind this tighter requirement. It is to minimise ‘unnecessary ongoing charges’. The FCA states:

“Ongoing advice charges create a conflict of interest, as an adviser may have a strong monetary incentive to recommend one course of action over another. Over time, these charges can have a significant negative financial impact on the consumer’s transferred funds and, as a result, the pension income they can take.

To address ongoing conflicts of interest, advisers must consider an available workplace pension as a receiving scheme for a transfer and demonstrate why any alternative is more suitable. Transferring to the default arrangement of a workplace pension scheme reduces the need for, and costs of, ongoing advice. It should also reduce the level of transfers involving unnecessarily complex products and high product charges.”

This comes as no surprise as the issue has been highlighted several times over the past couple of years. In particular, CP19/25 has some interesting examples of the significant adverse impact of ongoing charges, indicating that typical ongoing charges could represent between 44% and 61% of the member’s pension income.

In monetary terms, based on the ‘typical’ transfer of £350,000, total deductions (ongoing adviser and product charges) would range from £435 to £730 each month. That is a substantial annual cost to the client of between £5,220 and £8,760, representing a significant drag on returns over time. And if the client is in decumulation mode, those charges, albeit reducing with the value of the fund, are coming out of the pot on top of any client withdrawals.

Considering a WPS
This is an extension to the longstanding COBS 19.2.2 rule, commonly referred to as RU64, that requires stakeholder pensions to be considered. In our experience, the stakeholder option is often discounted on the basis of some brief standard text in the suitability report, regardless of whether it is relevant to the client in question. This experience chimes with the FCA’s findings that a WPS/stakeholder is mostly discounted because:

  • the WPS is stated to offer inadequate fund choices …
    “Yet, in many cases, advisers are not able to articulate the need for a vast selection of funds.”
  • the client needs the adviser’s ongoing advice service …
    “We have seen firms recommend more expensive schemes on this basis … and so considering the charges for managing the pension are justified. When combined with multiple layers of charging such as platform charges, charges for discretionary fund management as well as product charges, advisers are not giving sufficient attention to value for money. The high cost of some recommended investment solutions contrasts sharply with the lack of charges incurred by members if they stay in their DB scheme.”

These are specifically addressed in GC20/01 guidance that was published alongside the policy statement. The guidance states that the FCA will expect to see consideration of:

  • whether the client needs a broad range of complex funds that require ongoing rebalancing, given their risk profile, and knowledge and experience of investing;
  • the proposed product charges with those in the capped WPS default arrangement, and how the level of charges could affect the income the client will ultimately receive;
  • whether ongoing advice is necessary, given these points, or whether the client is likely to be better off taking ad hoc advice when needed.

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

It is clearly going to be much more challenging for firms to discount using an available workplace pension scheme in the new environment. This could have a significant impact on firms’ business models and recurring revenue.

In addition, firms will need to resource and implement a whole new area of research and administration, namely identifying and obtaining relevant information in relation to an available WPS.

Firms will need to decide their policy on considering previous WPS if there is no current one. While the rules will not require firms to do so, firms will still have to consider whether the principles around fair treatment of clients create an obligation to do so.

Either way, all this will involve extra work and extra expense, at the same time as contingent charging is prohibited and ongoing charges come under threat. Firms might wish to take this as an opportunity to recast their charging model, at least around transfer advice.

However, there are many client scenarios which justify a transfer despite the regulatory starting point that ‘transfers are not suitable’. In a similar vein, there are many genuine reasons that would justify a personal pension as more suitable than an available WPS. We won’t go into those here other than to say that we are working on a guide around this aspect and that should be available in the next few weeks. We will let you know when it is ready.

Needless to say, ATEB Suitability report software will be updated in readiness for 1 October. If you are not already a Suitability user, you can sign up for a free trial.

Action Required By You

Firms that intend to continue providing advice on pension transfers should:

  • ensure they are familiar with the new rules by 1 October;
  • consider a review of their fee scales, at least in relation to transfer advice;
  • start to create a process for obtaining and analysing WPS information;
  • implement adviser training around the new rules where required – ATEB can assist with training and will have a webinar available in the near future;
  • consider ATEB Suitability report writing software if not already a user – you can sign up for a free trial here;
  • ATEB has considerable experience in helping firms provide robust and compliant transfer advice. Contact your usual ATEB Consultant for assistance, or contact ATEB directly.
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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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