Benchmark the destination for DB transfers with low-cost auto-enrolment workplace pensions will not give the consumer protections the FCA hopes says LCP.
The consultancy has questioned the logic of FCA rules requiring DB transfers to move to a scheme benchmarked against low-cost workplace pensions. LCP says the needs of customers making large single-premium transfers, typically closer to retirement, are markedly different to low earners making regular premiums.
Under new rules to be introduced from 1st October, IFAs who are recommending a transfer out of a DB pension will need to benchmark the proposed destination for the funds against a low-cost workplace pension.
New analysis from consultants LCP based on a survey of master trusts shows that, as a result, this new FCA requirement may not provide the consumer protection that is intended.
In the current DB transfer market, most transfers are to self-invested personal pensions (Sipps), personal pensions or to retirement products such as drawdown accounts. Relatively few transfers are to master trusts or to the existing workplace pension of the transferring member.
The FCA has 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 them down, the FCA will now require advisers to benchmark the proposed investment product with transferring into the clients’ workplace pension, which may well offer a lower cost, particularly master trusts by virtue of their scale.
LCP says that 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.
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.
LCP surveyed 13 master trusts, including the largest providers in the market, and asked a series of questions about their approach to DB transfers.
The largest master trust by membership, Nest, said it did not accept DB transfers at all. Others generally said that they did accept transfers in, provided that the transferring member already had a policy with the master trust. Other standard requirements were evidence that the member had received advice from a qualified adviser, which is not always required if the transfer value is below £30,000. In some schemes, there was a further requirement that the advice was in favour of a transfer.
Schemes also wanted confirmation that issues relating to the member’s DB rights, such as equalisation of GMPs had been resolved. This could be a barrier to a transfer in case where the scheme has not made much progress on this front, says LCP.
The survey found some schemes reported that they would not necessarily offer lower charges, even if a large sum was transferred in. By contrast, an individual investor may be able to secure lower charges in an investment product where they were investing a relatively large sum.
Several schemes talked about plans to ‘upgrade’ retirement offers or to review their post-retirement options, perhaps in recognition that this had not so far been a priority in the design of master trusts; for example, even relatively basic features like offering a monthly income in drawdown were not offered by all.
One of the largest master trusts said it did not currently have any ‘at retirement’ options other than transferring to another provider or cashing out under ‘small pot’ rules.
Not all master trusts allow members to deduct ongoing advice costs through ‘adviser charging’ from their pension fund, which can be a highly tax-efficient way of paying for advice, the report found.
LCP principal Philp Audaer says: “Master trusts were generally designed to be a mass-market workplace pension solution for companies wishing to comply with automatic enrolment legislation, as opposed to receiving large transfers in which reflect the value of years of past service in a DB occupational pension. The focus of most master trusts has been on the accumulation phase, with particular emphasis on the structure of the default fund which covers the vast majority of members. By contrast, someone transferring in a large DB pension may be looking for a wider range of investments and more tailored post-retirement options. Although the market is developing, relatively few master trusts currently offer this degree of equivalence. As a result, IFAs will often find it relatively easy to meet the FCA’s requirement to benchmark against a master trust and make a convincing case in support of their preferred investment option. This benchmarking is therefore unlikely to provide the degree of consumer protection envisaged by the FCA”.