Workplace Pensions

Firms providing defined benefit pension transfer advice must now* consider using any available workplace pension scheme 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 scheme (WPS).

(*Transitional rules apply where a suitability report is prepared before 1 January 2021 permitting firms to omit the comparison with a WPS in APTA where they can demonstrate that the advice process started before 1 October 2020)

We wrote about this in a recent article so will not revisit that detail here. This piece is about how firms can fairly review and assess WPS given the probability that few firms gave more than the briefest of consideration to these previously.

Understanding WPS
In our previous article, we gave the technical definition of a WPS. For the purposes of this article, we look at the fundamentals of WPS.

WPS are intended to be low cost for employers to set up and run and low cost for members in comparison with individual personal pension plans. In addition to NEST (set up by the UK Government), the big two master trust WPS providers are:

  • The Peoples Pension (B&CE);
  • Now:Pensions.

There are some other smaller active master trust auto-enrolment scheme providers, including Smart Pension and Creative AutoEnrolment.

A number of traditional pension firms also offer workplace schemes, including AON, Aegon, AVIVA, L&G and Standard Life.

It’s all about default
Where there is an available WPS, the rules require a comparison to be made with that WPS using the default fund for that particular scheme.

Specifically, the Appropriate Pension Transfer analysis (APTA) must:

  • assess the benefits likely to be paid and options available under the ceding arrangement;
  • compare these with benefits and options available under the proposed arrangement;
  • where the proposed arrangement is a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme (WPS), and a qualifying scheme is available to the retail client, compare the benefits and options available under the proposed arrangement with the benefits and options available under the default arrangement of the qualifying scheme. 

The default fund is intended to offer an appropriate investment strategy for people who can’t, or don’t want to, make their own pension investment decisions.

The default fund AMC is charge capped at 0.75%, but note that there could be additional charges for the member … for example for administration of a change to the contribution level.

The charge cap is currently under review by the Government to ensure pension scheme members are getting value for money – implying a reduction is likely. The Government hasn’t specified how it may change the rules but the response should be delivered by the end of 2020.

The charge cap only applies only to members in the default fund – not to members who make an active choice to select a different fund. Other funds may be charged on a different basis.

Research resources
Obviously, the first place to start is to identify whether there is an available WPS that will accept transfers in and, if so, the details of that scheme, including but not limited to charges, funds the member is invested in and information on the default fund.

It could well be that the WPS is one that is commonly used – for example one of the master trust schemes or a provider with good market share. It would be useful for firms to build up a knowledge of the most common WPS so as to aid their assessment of that in the transfer advice process for a particular client.

There are a few places where useful information can be found. For example, Smart and The Peoples Pension have comparison tables on their websites. And there are numerous links online to aid research on particular arrangements.

Firms should definitely also refer to the latest defaqto guide, ‘How to analyse workplace pension default funds’. This guide, published in April 2020, updates the 2019 version and covers:

  • Key factors to consider when reviewing default funds
  • Comparison of default funds

In addition to providing a valuable source of information, there is the added bonus that the document is accredited by the CII/PFS and CISI for up to 60 minutes of structured CPD.

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

How well firms address this new requirement to consider a WPS will undoubtedly form part of any future assessment by the FCA of the suitability of transfer recommendations, so it is important to get the process right from outset. Documenting the relevant information about an available WPS will be key, as will being able to show that a recommended alternative personal pension plan is MORE suitable.

It will clearly not be sufficient to use the tired tick box rationale that has often applied historically when firms have discounted use of a Stakeholder plan.

In fact, the new rules specifically state that one of the ‘generic’ reasons often used in relation to discounting of Stakeholder plan is not sufficient reason for discounting a WPS, namely that one of the retail client’s objectives being to have access to a wider range of investment options than available under the default arrangement of the qualifying scheme should NOT be taken as sufficient to demonstrate that the personal recommendation is suitable.

Costs are clearly not the only factor in assessing the suitability of a transfer recommendation, but they are a major factor. Using a WPS as the destination for any transferred funds is likely to be a more cost effective option than a personal plan, especially if the client has many years to go before they can or will access the funds where the ongoing charges often associated with a recommendation to transfer to a personal pension plan act as a significant drag on returns.

Action Required By You

  • Ensure that the firm’s processes and documentation fully reflect the current rules on pension transfer advice;
  • Ensure that all advisers involved in transfer advice are aware of the new rules;
  • Undertake training if required;
  • Contact ATEB for assistance in implementing a robust and compliant pension transfer advice process.

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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