Interviewed by Pietra Asprou, Suzanne Padmore and Sue Young provided their thoughts in an article first published on Lexis PSL.
This considers the significance of the publication of the Financial Conduct ity (FCA)’s Policy Statement on Pension Transfer Advice (PS20/6) following its earlier proposals on a package of pension related measures designed to improve the quality of pension transfer advice, and also protect members of defined benefit schemes who wish to transfer out of their pension benefits.
1) What is the background to the publication of the FCA’s Policy Statement ‘PS20/6 Pension transfer advice: feedback on CP19/25 and our final rules and guidance’?
Since the introduction of pensions freedoms in 2015, billions of pounds of pensions savings have been transferred out of occupational defined benefit (DB) schemes to personal pension arrangements. Since 2017 alone, £38.3bn has been transferred from occupational DB schemes. Alongside welcome flexibility for many, other pension savers have suffered loss in value due to poor investment decisions or, worse, being the victim of a scam. To enable a transfer, most members of DB schemes are required to take independent advice on the transfer but the Work and Pensions Committee and the FCA have repeatedly raised concerns over the DB transfer advice market.
The FCA launched its suitability review in April 2016, where it began gathering data on advice files to determine the suitability of firms’ advice. Results were published in May 2017, and although in 93 percent of cases advice was suitable, it identified that the defined benefit transfer advice area represented a high risk of consumer detriment. The FCA conducted a second review in 2019, and published the results alongside PS20/6. It identified that some consumers may have received poor advice to transfer out of their DB pension to a defined contribution (DC) scheme.
On 30 July 2019, the FCA published a package of pension related proposals designed to improve the quality of pension transfer advice, and to help consumers get better value from their pension. The proposals included a consultation (CP19/25) proposing a ban on contingent charging for transfer advice, and a feedback statement on competition in non-workplace pensions. The FCA also published its policy statement concerning its Retirement Outcomes Review through which it provides for new rules and guidance to help non-advised drawdown consumers.
2) How did the pensions industry respond to the government’s initial consultation of July 2019? Were there any significant concerns highlighted?
Whilst generally supportive of the FCA’s package of measures, doubts were expressed about the effectiveness of the key proposals to achieve the FCA's aims – with some suggesting that the measures will not affect the quality of advice consumers receive.
The consensus on contingent charging seems to be that the ban should reduce the proportion of consumers receiving unsuitable advice, and reduce some of the high charges consumers pay. However, there are credible concerns that the ban will reduce the number of advisers in the market, thereby reducing the availability of advice for consumers. The industry considers that an abridged advice process might alleviate some of the impact of this. However, stakeholders are concerned about the viability of the process for advisers and, in particular, whether it will be cost effective to operate.
The proposal to recommend an available DC workplace pension scheme (WPS) as a default DC destination scheme triggered respondents to identify many scenarios in which a WPS would not be suitable. Although participants agreed that they should demonstrate why their recommended scheme is more suitable than a default WPS, they believe the proposal does not consider the value of ongoing advice to investors.
3) What are the key changes being brought forward in PS20/6 and do they raise any important new details and issues? What are the particular challenges?
The ban on contingent charging and new advice processes are the notable changes being brought forward.
The ban on contingent charging means that all advice will be charged upfront, whether a transfer occurs or not (with limited exceptions). Consumers will also receive information about charges prior to taking advice. If the ban does reduce the number of advisors in the market, the timing is a potential issue. If there is the expected economic downturn following coronavirus (COVID-19), there may well be a rise in the number of people looking to complete DB to DC transfers, just at the time when advisors are withdrawing from the market, therefore creating a gap in the market at a crucial time.
The FCA has altered triage services proposals to clarify how advisers should help customers decide if they need regulated advice. The perimeter guidance (PERG) has been updated so that advisers can no longer use Regulated Activity Group (RAG) tools, such as decision trees and RAG rated questionnaires, as part of the non-advised triage service, due to the binary outcomes being too close to regulated advice.
The introduction of an abridged advice process means firms will only be able to advise a client not to transfer, or that it is unclear whether they would benefit from a transfer, as part of initial advice. It will be key for firms to avoid duplication of charges if customers progress to full advice, and to manage insistent clients appropriately.
Workplace Pension Schemes
Advisers will also now have to consider a DC WPS as a default for transfers out of DB schemes, which would reduce the need for ongoing advice. Naturally, recommending a DC WPS that will reduce product and ongoing advice charges is not commercially appealing for advisers – and it will be challenging for most providers whose business models rely on that income.
4) What other package of measures were also announced by the FCA alongside PS20/6 to help improve standards and build on the work it has done in the defined benefit transfer market?
Policy Statement (PS20/6)
The FCA published its policy statement alongside a new Guidance Consultation (GC20/1) and an update on its suitability review.
Guidance Consultation (GC20/1)
The Guidance Consultation sets out non-Handbook guidance on what is suitable or unsuitable advice, in response to industry requests for more direction. It also consults on a factsheet for employers and trustees, and a scheme data template to help advisers get the right data from a DB scheme before giving advice.
As part of its suitability review, the FCA found that although the suitability of advice had improved over time, there was still a high proportion of unsuitable advice, evidence of firms failing to collect the information necessary to give suitable advice, and firms having insufficient PII cover. This led to more firms giving up their DB advice permissions, and the FCA launching enforcement investigations.
The FCA has also produced an ‘Advice Checker’ to enable consumers who took advice on transferring their DB pension to assess whether they received poor advice, and decide whether or not to pursue a complaint if they did.
5) What impact do the new rules and/or proposed changes have for financial advisers, providers, pension scheme trustees and members?
If firms rely on contingent charging and ongoing advice fees as their primary income, the changes may ultimately impact whether they can continue operating in the market.
It is a known issue that advisers are struggling to obtain PII, which they require to continue offering advice. Along with increased regulatory scrutiny because of the new rules, and fewer firms in the market, this could mean that firms remaining in the market find it even harder to obtain PII. Also, practically the market may not have enough capacity to provide DB transfer advice when there is peak demand.
There are a number of technical changes in PS20/6 and advisers/ providers will need to digest these and change their processes accordingly. The definition of ‘Pension transfer’ for example has been amended to reflect the definition in the Regulated Activities Order. This means that the transfer of all safeguarded benefits to flexible benefits are now included within the definition (but transfer from flexible benefit schemes have been removed from the definition). The FCA has also clarified guidance on Transfer Value Comparator methodology, using cashflow modelling, and advising customers with an Enhanced Transfer Value.
It is unusual for the FCA to be so prescriptive on what constitutes poor advice (through the publication of its Advice Checker and Guidance Consultation) and firms may be concerned about the potential for complaints to flow from this new guidance.
Pension Scheme Trustees
While pension scheme trustees will feel reassured that extra steps are being taken to help improve the quality and integrity of the advice their members receive, it is important to remember that trustees have no visibility over the quality of advice provided (and nor would they wish to act as a check on such advice). Assuming the member in question has confirmed that the advice has been taken from a suitably ised adviser, and other statutory requirements have been met, the law requires them to agree to the transfer out. This can be problematic where there are numerous warning signs that point to a scam, but the statutory requirements appear to have been met. In this scenario, the current position is that trustees are not able to block a statutory transfer, which can leave trustees in the invidious position of having to allow a transfer out which they doubt is in the member’s best interests. This is an area that is being looked at: for example with suggestions outlined in the Industry Code of Practice on Combatting Pension Schemes, changes in the Pensions Schemes Bill regarding the requirements on receiving schemes and the Pensions Administration Standards Association (PASA) DB Transfer guidance published last summer .
Pension scheme members should have better information on, and access to affordable initial advice. However, it will not be as easy to transfer out of a DB scheme, and the ban on contingent charging could create too many initial financial hurdles for most members. Having said that, some schemes may look to put in place more favourable charging arrangements with recommended advisers, and in some circumstances this may be something that the employer is willing to subsidise, either in part or in whole (due to the generally beneficial funding impact of members transferring out for schemes that are in deficit).
6) What is the timetable for implementation of the changes? What are the FCA’s next steps to improve the defined benefit pension transfer market?
The guidance on triage services and estimated transfer values became effective on 15 June 2020, with the majority of the new rules and guidance (including the contingent charging ban) coming into effect on 1 October 2020.
The FCA has said it will continue to engage with firms assessed under its suitability review and will issue data requests to firms with pension transfer permission to help target its investigations. The Guidance Consultation closes on 4 September 2020. There are concerns in the industry that ongoing advice charges will come under pressure next, but the FCA has postponed this work until early 2021.
Written by Suzanne Padmore, Susannah Young and Heather Musk.