In just over a month’s time a “contentious” Financial Conduct Authority rule comes into effect requiring IFAs recommending a transfer out of a DB scheme to benchmark the proposed destination for the funds against a low-cost workplace pension.
The rule, which comes into effect from 1 October, was one a range of measures set out by the FCA in June 2020 in a bid to transform the DB transfer space – including steps to reduce conflicts of interest by banning contingent charging.
The FCA has also expressed concern that some of the products currently commonly used for transfers come with multiple tiers of charges and may represent poor value.
In order to put pressure on advisers to justify these charges, and to drive costs down, the FCA will now require advisers to benchmark the proposed investment product against transferring into the clients’ workplace pension, which may well offer a lower cost.
But many of these workplace pensions were designed for automatic enrolment and regular contributions by active members rather than large transfers in from DB pension schemes by members approaching retirement.
In the current DB market, most transfers are to self-invested personal pensions (Sipps), personal pensions or retirement products such as drawdown accounts. Relatively few transfers are to master trusts or to the existing workplace pension of the transferring member.
One of the most contentious areas of the FCA’s new rules
Portfolio Adviser sister publication International Adviser spoke to several members of the industry to discuss the FCA’s benchmarking plan.
Andrew Tully, technical director, Canada Life, said: “Given most people now have a workplace scheme it is sensible it is considered as a possible home for any transfer.”
Steven Cameron, pensions director at Aegon, said: “This is one of the most contentious areas of the FCA’s new rules.
“If an adviser is recommending a transfer other than into the default fund of a workplace pension, they’ll need to demonstrate why this is not just as suitable, but more suitable, than a workplace pension.
“The new rule will certainly focus advisers’ minds on workplace as well as non-workplace pensions, but the key will be to be clear on when, at individual level, a non-workplace pension will be more suitable.”
Justin Corliss, senior pensions development and technical manager at Royal London, said: “It’s difficult to say if this will work prior to the rules coming into force on 1 October 2020, but advisers in the pension transfer market are very aware of it.”
Shortcomings in the FCA’s benchmarking rules
Recently, pension consultancy firm Lane, Clark & Peacock (LCP) carried out a survey and found two reasons why the benchmarking concept may not achieve the desired goal.
“The FCA increasingly expects DB transfers to be suitable only for those approaching retirement, some of whom will not be members of a workplace pension scheme; an adviser can therefore explain that this comparator is not relevant to this particular client,” LCP said in a statement.
“Even where the transferring member is a member of a master trust, LCP’s survey suggests that the limited options offered by master trusts may mean that it would still not be a suitable destination for a large DB transfer.”
Cameron added: “The default fund for a workplace scheme is designed to be broadly appropriate for all members of all ages and at all levels of contribution.
“What’s right for a 22-year old being auto-enrolled and paying in £30 a month may be far less so for a 59-year-old with a £500,000 transfer value about to take an income.
“That same individual may be seeking a particular pension freedom option and not all workplace pensions offer the full range.
“Some workplace pensions also don’t facilitate adviser charging, so the individual may face paying a separate fee which is less tax efficient.”
How the benchmark could help the client
The FCA said in June that the changes to the DB transfer market were looking to “support” customers who are considering whether to transfer out of a scheme or who have already transferred out.
So, will the benchmark idea actually benefit the client?
Canada Life’s Tully said: “Many people will be better served by staying in their DB pension. It is unlikely that a client who is some years away from seeking to take benefits should transfer, and that is recognised in the rules from the regulator.
“And transferring someone out of a DB scheme to an individual arrangement simply because it allows them access to a wider range of funds is unlikely to be a sufficient reason to show the individual arrangement is more suitable than the client’s workplace pension.
“However, the rules also show that some clients may benefit from moving to an individual arrangement, if the client is an experienced investor, within 12 months of taking benefits, and any workplace scheme to which they belong doesn’t provide a range of flexible income options which meet the client’s individual needs.”
Royal London’s Corliss said: “The vast majority of advisers in this market care about their clients and make every attempt to identify the best solution for them.
“However there have been instances, perhaps best illustrated by the issues surrounding the British Steel Pension Scheme (BSPS), where pension transfer customers have been transferred into complex and expensive plans with high product and exit charges.
“It’s quite possible that had this rule been in force at that time, some of the less suitable client outcomes could have been avoided.”
What’s the alternative to the benchmarking rule?
If the concept that the FCA is bringing in is “contentious” and does have flaws, is there anything else that the UK regulator could implement?
“There are no alternatives. It’s a case of stay in the DB scheme, transfer to a workplace scheme or to an individual arrangement,” Tully added.
Corliss said: “It’s a reasonable rule which has always been there it has just been ‘beefed up’, a bit moving from ‘as suitable’, to ‘more suitable’. The important thing is that clients and advisers appreciate what it is saying.
“The rule doesn’t say you must use the workplace pension scheme, rather if another option is chosen there needs to be robust analysis on the file as to why this is a more suitable option.”
Aegon’s Cameron said: “The key is for the FCA to take a balanced approach to when advisers recognise at individual level that a non-workplace pension is more suitable, and don’t challenge advisers inappropriately.”
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