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.
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);
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.
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.