The planned ban on contingent charging for pension transfers is due to come into force early next year yet the FCA has other significant measures up its regulatory sleeve.
Six months after the ban, the FCA plans to require IFAs to strongly favour workplace pension schemes in their post transfer recommendations.
The paper entitled Pension transfer advice: contingent charging and other proposed changes was published in July.
It says: “We have seen in our thematic work that workplace pension schemes are rarely used to consolidate pensions following a transfer. This is despite 98 per cent of employers using a DC scheme for auto-enrolment purposes.
“The majority of these are master-trust and contract-based schemes that accept inward transfers. We are aware that some trust-based DC schemes do not accept transfers. A growing number also offer decumulation options.” However, it is the following passage that may upset some retail advisers. “If advisers recommended a default fund in a WPS as the receiving scheme, it’s likely that a transferring member would not require advice again until decumulation and their product charges would be capped at 0.75% each year. On an average transfer value, this would mean product charges of £220 each month, considerably lower than the charges outlined above.”
The regulator says i ts calculations show an average of £38,000 saving using an average CETV of £350,000 and across the market a potential saving of £399m-£598m each year.
Therefore, it is proposing requiring firms to demonstrate why the scheme they recommend is more suitable than a WPS including an analysis of a transfer into the default arrangement of an available WPS in the Appropriate Pension Transfer Analysis (APTA).
The proposed guidance also sets outs circumstances where another type of scheme may be more appropriate.
These are – the client does not have access to a default fund as an active or deferred member the scheme does not accept transfers in; the advice sets out why and how the member will access the funds within 12 months of decumulating, and the WPS is incompatible with the way the pot will be accessed; and, the member can demonstrate prior evidence of investment activity through an adviser or active investment choices as a self-investor.
The FCA also estimates that between 30 and 45 per cent of consumers would have access to a WPS that should be suitable for them.
Some providers will be happy to take the business.
A spokesman for Aviva says: “Advisers should consider the client’s current active workplace pension to determine if this can meet the client’s objectives relating to the transfer. The adviser should consider whether workplace schemes can provide lower charges than those available to a client individually because of the buying power and lower charge profile that can be available to a Workplace Pension scheme.
“A good workplace pension should have the flexibility to accommodate the investment strategy required to support a transfer, but this should form part of the adviser assessment and product suitability process.
“We agree that not every workplace pension will be appropriate, but that also applies to individual arrangements. It will be up to advisers to understand the relative strengths of workplace pension propositions before they make a recommendation. We’re able to help them do that and are confident that our workplace propositions stack up well against individual pension or platform alternatives.”
Advisers however remain deeply sceptical. CanScot Solutions principal Robert Reid says: “Most workplace schemes run on a default fund or have a glidepath taking you to cash. You can’t go there if you are looking at drawdown instead of an annuity. If it is more modern, the question is whether it really aligns with the person’s risk profile. With the best will in the world, the adviser that is doing the transfer will know a hundred times more than the WPS. You’ll have a guy who has paid £3,000 for a personalised report, paying for something that is not personalised.
“If want to evaluate the scheme you have to look to see whether it is capable of letting the client do what he or she wants. What are the funds? Is it restricted? What about ESG?
“They are focusing on solely on cost, which is a gross simplification of the situation. If you then add the layer of investment pathways where you don’t know if the scheme carries any liability, and you have a real issue. The problem is a regulator that remains so fixated on a product sale that it thinks there is a silver bullet.”
Nexus IFA managing director Kerry Nelson says: “In the transient world we live in we don’t see people in occupations for long periods of time. I saw someone recently in a job for six years, but that is now really unusual. The culture is to move every two or three years. If you move a DB scheme, into an existing, incumbent workplace pension, and then the person leaves five minutes later, they are not going to be a live member of that scheme. The whole point is to have a core scheme that lets people consolidate things in one place on the basis people move around so much.
“If you do end up transferring a DB pension which is a significant piece of advice, do you really want to transfer the decisions to a workplace pension provider, rather than you and the client making those decisions?”
Others remain relatively relaxed about the change.
Hurley Partners DB transfer specialist James Hounsell says: “In my view, advisers should always consider the full range of options available to meet client objectives. This is not a new requirement. The regulator has previously made it clear to advisers the need to fully consider stakeholder pensions as a destination for individuals wishing to transfer defined benefit or defined contribution pensions to another pension arrangement.
Workplace pensions are entirely appropriate for individuals wishing to invest in collective investment funds. However, for those wishing to appoint a discretionary investment manager or invest in commercial property, workplace pensions are unlikely to be appropriate. Drawdown options from workplace pensions can also be limited and in some instances do not include the full range of flexibility offered by say flexi access drawdown”
The advisers, who have concerns, have what may seem an unexpected ally in a former pensions minister. Baroness Altmann says: “The idea of requiring all transfers to be made into workplace pension schemes is dangerous and a very bad idea. can see the attraction to the Government and regulator and clearly there are powerful forces at work here.
“This would be a potentially good boost to Nest and would also benefit existing workplace pension providers and allow master trusts to achieve scale more quickly.”
She notes that it also makes things easier to regulate.
“However, for those who transfer money out of their DB scheme and want their financial adviser to help with a Sipp or a Ssas, the requirement to move into a workplace scheme will put a damaging barrier in their way. And many people will be put into a workplace scheme with, say, a lifestyle fund and if they are already in their 50s, then their DB pension will be moved more and more into cash/lower expected return assets ahead of the workplace scheme’s pension age, which could be 60 or so.”
“That would undermine the long-term return prospects of the client’s money, drive them away from getting professional expert advice and probably result in them taking their money out too soon, or completely or paying huge extra amounts of tax that they do not need to pay.
“The idea of freedom and choice was precisely meant to be giving freedom and choice. If that freedom is condensed into only being free to move to a workplace arrangement which many will not know is not actually in their best interest, then the rationale for transferring is likely to be undermined in many cases.”
“Being shifted into a workplace default fund, whether target date or lifestyle, is trying to turn freedoms back into a narrow range of options that are based on ‘one size fits all’ rather than being flexible enough to cope with each individual’s needs.”
“SIPPs allow you to choose your pension date. Keep money in the pension for longer, select the best investment approach and plan your later life income carefully. Most people will need help with this but if they are just switched into a workplace pension scheme’s default option then there may be less downside but there will also be far less upside.”
Former regulator and now consultant Rory Percival, considering the regulator’s rationale says: “Where the FCA includes proposed guidance on assessing suitability in a consultation paper, reading between the lines, I see this as meaning that the FCA thinks this should be happening anyway as part of the existing advice process, but it is not seeing it when doing file reviews. It is putting it in the Handbook so that the sector considers this issue in future.
“With the exception of serious ill-health, I am increasingly of the view and I expect the FCA is too that clients shouldn’t be transferring DB schemes unless they need to access benefits immediately or in the near future. If they are not accessing some of the benefits of DC now, why move to a DC scheme now? Hence, I think transfers some time from taking benefits should be the exception. “In these cases, over one year from retirement, then it makes sense to consider the workplace scheme as a new home and this is an extra step beyond what most firms have been doing before.”
Corporate advisers remain reasonably relaxed about the measures. Buck head of DC and wealth Mark Pemberthy says: “Workplace schemes should be considered for transfers as they are usually well governed and have much lower charges than personal pensions. There are a number of practical issues an adviser would invariably consider when recommending a receiving scheme for a transfer such as whether transfers are permitted, retirement options, investment options etc, but any provider recommendation should absolutely consider the individual’s workplace pension arrangements for any pension transfer or aggregation exercise.”
“However, all providers and trustees have different appetites for risk or concern over reputational damage [from taking transfers] so I would always expect there to be differences in approach.”