Caution, Increased DB Transfer Workload Ahead

You would be forgiven if you had chosen to ignore the recent FCA paper with the catchy title CP19/25. It seemed to pertain only to defined benefit advice.

Therefore, if you do not usually get involved in this area, reading it may have seemed like a solid few hours you wouldn’t get back. And we all need that time for sunbathing in this tropical weather, right?

Well as I have no life and I couldn’t find any tropical weather up north, I did read it and there was one part that set off my spidey senses, which keenly detect situations that may create more work for me.

The defined benefit market is the current focus for the FCA, but it stands to reason that what it looks at as suitable for that level of advice, may eventually bleed into the wider, pension switch market and beyond. So these guidance papers are often a good indicator of the future.

The main area which I think will affect all of us, is the focus the FCA is putting on eliminating other options when considering a pension transfer. A few years ago, the emphasis was on stating the reason why a stakeholder was not appropriate for a transfer and, at the same time, you should also discount the client’s workplace pension and alternative pension contracts. As a reminder, pension business is the only area of advice where you are encouraged to state reasons why something is NOT suitable as well as reasons why it is.

CP19/25 goes a little bit further, setting its sights on workplace pensions and inferring you should no longer give lip service to discounting a workplace pension as a suitable holder for pension transfer monies. You can no longer use generic terms such as ‘limited fund range’ or ‘restrictive retirement options’ and may God have mercy on your soul if you state that it’s not suitable as it ‘does not allow adviser charging.’

Now, it is instead proposed a cost comparison MUST be completed showing the cost a client would pay had they moved funds into the workplace pension against the recommended pension. And if there is an increase in costs then a full explanation should be given to justify the costs. This then must be signed by the client as part of a new, multi-signature page which shows the client understands a variety of things around the transfer, including costs, the recommendation, the transfer risk warning and the ongoing advice service. Each element must be signed.

So one extra page, not much extra work really… but, where I foresee some issues are simply getting that data from the client in order to determine the suitability of the workplace pension, and doing all of the additional analysis. Obtaining authority on workplace pensions can be tricky and getting transparent charges even trickier. Once completed, advisers could look at a scheme and see immediately it would not be suitable to receive £2m in defined benefit transfer monies but beforehand, it cannot be assumed. It should be built in as an option to your cashflow. You will need to obtain projections or calculate reduction in yields and ensure all analysis is clear and transparently provided to the client.

A significant fall in gilt yields during August outweighed the impact of a small fall in inflation expectations to drive transfer values up.

As I stated at the outset, this is not yet a requirement for all pensions, but I have a feeling it might be at some point. And as with all things from the FCA papers, it may be best to get ahead of the curve and start working on it sooner rather than later. Making friends with group pension administration teams now may well be a good investment for the future.

Jo Campbell – Director of Operations & Quality.

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