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Pension transfer: Considering a workplace pension

11 April 2021

ATEB Consulting’s Steve Bailey examines why and how Paraplanners should consider a workplace pension in a pension transfer recommendation.

Firms involved with pension transfer business will know that there is a requirement to consider an available workplace pension (WPS) as the destination for any transferred funds. If the recommendation is to transfer to an alternative proposed arrangement, for example a personal pension/SIPP/flexidrawdown plan, firms have to demonstrate why the scheme they recommend is MORE suitable than the default arrangement in the Workplace Pension Scheme (WPS). This is a substantively higher test than the ‘at least as suitable’ test that previously applied.

The comparison only NEEDS to be done against the DEFAULT arrangement in the most recent WPS, but firms can choose on a case by case basis to consider previous WPS if, for example, the most recent WPS does not accept transfers in.

There is a formal FCA Glossary definition of ‘default arrangement’ but essentially it can be considered to be the default fund or funds in which the member’s pension is invested if the member makes no specific investment election (or, of course, if they actually choose to be in those funds). Of course, it is possible that there could be clear indications that the client should not transfer at all before getting anywhere near consideration of a WPS but, if that is not immediately obvious, then the APTA / TVC and a comparison of the benefits and options available under the proposed arrangement with the benefits and options available under the default arrangement of the WPS is the next step, i.e. if a transfer is considered to be suitable, you need to consider whether the workplace pension is the best destination for transferred funds rather than a proposed personal pension plan.

The suitability bar is quite high, i.e. the proposed arrangement should only be recommended if it can be shown to be MORE SUITABLE than the WPS.

That comparison will (or should) indicate the merits of the personal pension plan being considered for recommendation and it is fairly likely that the relative costs will be the major factor and that the WPS costs are often going to be lower, primarily because the WPS is probably not going to justify ongoing adviser charges for regular reviews. In PS20/06, the FCA covered use of WPS under the heading ‘Addressing ongoing conflicts’ and, if that is not proof enough that minimising or avoiding the need for ongoing adviser charges was the entire rationale behind the new rules on WPS, some of the statements in the policy paper explicitly confirm that to be the case … 

“… Ongoing advice charges create a conflict of interest, as an adviser may have a strong monetary incentive to recommend one course of action over another. Over time, these charges can have a significant negative financial impact on the consumer’s transferred funds and, as a result, the pension income they can take.
… The default fund in a WPS should be appropriate for all members without the need for ongoing advice.”

PS20/06 continued …

Our view is that many consumers would not benefit from ongoing advice as their circumstances are unlikely to change significantly from year to year. These consumers will be more suited to the default WPS fund. Where ongoing advice is needed and would add value for the consumer, we expect firms to consider this as part of the recommendation, including the option of paying ongoing adviser charges directly rather than via the scheme.”

Guidance in GC20/01 stated …

“We would expect to see, among other things, consideration of whether your client needs a broad range of complex funds that require ongoing rebalancing, given their risk profile, and knowledge and experience of investing the proposed product charges with those in the capped WPS default arrangement, and how the level of charges could affect the income your client will ultimately receive whether ongoing advice is necessary, given these points, or whether the client is likely to be better off taking ad hoc advice when needed “

Suitability

In assessing suitability of pension transfer advice, the FCA quite correctly considers there to be TWO recommendations – first, the transfer recommendation and second, the investment recommendation.

We were recently asked, “… when it comes to a recommendation of a fund surely we can’t then just recommend the default fund on charges if it doesn’t match the client’s ATR?”.

To see the answer to this question, it is helpful to break the decision process down to its key steps as follows:

  1. Undertake TVC/APTA etc. to assess whether a transfer is suitable at all
  2. If yes, then consider an available WPS as the transfer destination  – transfer to WPS recommended UNLESS …
  3. … the proposed arrangement can be shown to be MORE SUITABLE than the WPS as per the rules and guidance in COBS 19.1 in which case transfer to the proposed arrangement is recommended
  4. Recommend funds to be used.

Assuming that the comparison in 2 indicates in favour of the WPS as the recommended destination, the fact that the default fund does not match the client’s ATR is a point to consider as part of step 4. If you do recommend transfer to the WPS as above, then you might now wish to recommend that the client switch funds within the WPS so as to match the ATR. That is a separate question beyond use of the WPS as destination.

It’s not only about costs

Finally, although the costs comparison alone is likely to strongly favour the WPS in many, if not most, cases there are, of course other considerations. Here is what COBS 19.1 rules say in that regard:

“In taking into account … any other considerations that the firm may decide to take into account when demonstrating 7(b) (the more suitable aspect), the firm should also consider:

(a) whether those considerations are so important to the client as to outweigh other considerations in favour of the default arrangement of the available qualifying scheme; and

(b) why the outcome sought by transferring to a personal pension scheme, stakeholder pension scheme or defined contribution occupational pension scheme that is not a qualifying scheme cannot be achieved by transferring to the qualifying scheme.”

Our View

The need to consider an available WPS has created a whole new step, and extra work, in the transfer advice process. But the rationale behind the rule is clear. The onus is firmly on advice firms to be able articulate the value of ongoing advice.

Ensure your transfer advice process has fully integrated the steps necessary to meet the requirement to consider an available WPS. Contact ATEB if you would like to discuss how we can assist firms to implement a robust transfer advice process.

Professional Paraplanner