01 Jul The FCA and pension transfers
The regulator published its much-anticipated policy statement on defined benefit transfer advice. Most of it will be unsurprising to industry, as much had been mooted prior to its publication, but it does bring some additional clarification what constitutes suitable advice for DB transfers.
PS20/6 and GC20/1 build on two previous policy statements on DB transfer business. The guidance consultation ends in October.
Here are the main take-aways:
- A ban to contingent charge for advice on pension transfers and conversions (except in a few specific circumstances)
- Advisers must consider a workplace pension scheme (WPS) as a destination for a transfer
- Firms can give abridged advice – a short form of advice before offering full advice
- Raises the CPD bar for pension transfer specialists (PTSs)
- Require firms to submit new data to help supervise the sector
This paper builds on the last where the FCA found that 69% of DB transfer advice led to a recommendation to transfer, around half of which was inappropriate. As a result, the FCA is putting firms placing high volumes of this business under the microscope.
The FCA did report that it had seen ‘some good advice’, but found inconsistency in the advice, largely due to inadequate record keeping. Overall, the FCA reported that most firms gave a mix of suitable, non-compliant and unsuitable advice.
No contingency plans
From 1 October 2020, advisers are no longer be able to provide DB transfer advice on a contingent charging basis (where they charge the client if the transfer proceeds). The FCA hopes this removes the potential for advisers to be financially incentivised to proceed with a transfer. Instead firms should look at offering triage and an abridged form advice before delving into full advice.
Triage services, whether in-house or out-sourced to a third party, should only list the features and pros and cons of DB and DC schemes (and should confirm the FCA’s stance that most consumers are best advised to stay in a DB scheme). Triage could include advice costs for full and abridged advice.
Once the customer has been provided with this information, the customer decides if they want to go through abridged or full advice. Though standardisation of triage documents ensures each firm’s customers receive the same information, some may be put off by the complexity.
Abridged over troubled water
Advisers can now also offer abridged advice. The FCA hopes this shortened form of advice will cost less and filter out unsuitable DB transfer clients. Any charges for work to provide abridged advice cannot be included in full advice. However, advisers offering abridged advice still have a significant amount of fact-finding to conduct, which could make the difference between the cost of abridged and full advice narrower than the FCA would like, and leading to more consumers being priced out of DB transfer advice.
This short form of advice only has two outcomes: a recommendation not to transfer, or that it’s unclear whether the client would benefit. In addition, abridged advice ‘must not consider a proposed DC scheme when giving abridged advice’, as it doesn’t consider how funds might be invested if the transfer were to go ahead. This is one of the main challenges for abridged advice. Comparing a proposed new scheme would effectively be full advice, but leaving out the destination means only looking at part of the process.
The ban on contingent charging and the introduction of abridged advice as an intermediate step is a good thing in the main. It makes it harder bad advisers to proceed with unsuitable transfers and protects customers’ pensions. But on the downside, the amount of work involved in giving abridged advice is likely to price out some consumers who might benefit.
Supply and demand
The FCA’s solution does not address the issue of poor advice, it simply removes it. The wealthy will still be able to pay the fees, but the very people who need DB transfer advice for health or financial reasons will not be able to afford it— especially if the advice is not to transfer.
The FCA’s focus should be to ensure advice is tailored to ordinary pension savers and delivered in a way they understand and can act on. The abridged service is ultimately flawed because it’s an incomplete pathway that could lead most savers to a dead-end rather than a definitive answer. Banning contingent charging gets rid of supply, but does nothing about latent demand.
The FCA has confirmed that as part of offering full advice, advisers must look at client’s current DC workplace pension schemes (WPS) and illustrate how a transfer elsewhere is more suitable. It says that the default solutions, with capped fees, ‘are designed to be appropriate for all members, without members needing to take further advice on investments’. Curiously, since publishing this paper. the FCA has launched a consultation which aims to ensure WSPs are providing value for money for members, which rather suggests that it thinks some don’t do that.
While costs are likely to be lower in a WPS, asset allocations for those at retirement age are conservative, limiting further growth. There’s also the flexibility challenge. Most clients want to exit DB schemes to make use of the flexibility available through pension freedom. Though WPSs have broadened their pension withdrawal options, platforms tend to have wider drawdown options. As a result, the combination of platform and ongoing advice can meet client objectives while continuing to grow the investment in retirement.
Questions over the justification of ongoing advice fees crop up throughout the paper, and it’s not a stretch to surmise that it’ll be one of the main areas of focus in future. One of the regulator’s opening mentions is that the monthly ongoing charge is likely to be one of DB transfer clients’ largest monthly bills. It thinks too many have been put into complex, high charging solutions when cheaper alternatives (again, WPS) might be as suitable.
Closing the stable door after the horse has bolted
The rules around DB transfer advice will be tougher. The measure has been designed to staunch the DB transfer pipeline, but is too late. The regulator says 235,000 members took advice from 2,500 first on a DB transfer between April 2015 and September 2018 on transfer values worth over £80bn in total. More than 170,000 transferred, with around 5% doing so against advice.
Here at Fundscape we analyse the trends of the platform market with a fine-tooth comb. At the end of 2016 through to the third quarter of 2018 we saw a large hike in pension business, which was driven by DB to DC transfer activity. It’s clear to see the spike in pension sales from DB transfer business and subsequent return trend we would have expected to see as the regulator stepped in and PI premiums skyrocketed.
We can also see that the gap between gross and net sales widened after the DB transfer spike. The gap widens with an increase in withdrawals (or by transfers from the platform market to an off-platform solution). The gap indicates higher client withdrawals, which is to be expected as clients exercised their new pension freedoms by moving to drawdown. Many clients will be paying for ongoing advice, and it seems likely that advisers that have given DB transfer advice will face much more scrutiny over ongoing advice in future.
There’s a lot of good in this guidance consultation, but many advisers have already dropped out of the DB advice market. As part of the FCA’s investigation 700 firms volunteered to give up permission to provide pension transfer advice, but astronomical PI premiums made it untenable for some to continue long before the FCA stepped in.
For the remaining firms, there’s help to make sure they’re providing suitable DB transfer advice, but fewer are offering it. The FCA believes the number of transfers was too high, and these measures will slow them further. Originally slated to be introduced a week after publishing, the ban on contingent charging comes into effect on 1 October, due to Covid-19.
This is ultimately what the FCA wanted, but it restricts consumer options. Given the FCA’s assessment of DB transfer advice, some firms are likely to reconsider…