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.