Destination workplace

7 August 2020

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Our Senior Pensions Development and Technical Manager, Justin Corliss, considers the FCA’s strengthened position on considering a client’s workplace pension scheme as a destination for a transfer and why it might not be the best option for your clients.

When the FCA released policy statement PS 20/6 on the 5 June 2020, much of the initial reaction surrounded the news of a ban on contingent charging beginning 1 October 2020. That’s pretty understandable, it has a big impact on most adviser’s current charging structure and has been the subject of an ongoing “will they / won’t they” storyline for some time.

What didn’t receive quite so much attention initially, but is growing steadily, is the FCA’s strengthened position on considering the client’s workplace pension scheme (WPS) as a destination for the transfer. The new requirement is to demonstrate that any receiving plan the adviser selects in a pension transfer is more suitable than the client’s workplace pension scheme (WPS) if they have one.

Is a transfer to a WPS the right answer?

The requirement has a lot of merit. Particularly so in light of the regulator’s concern that too many transferring clients are recommended complicated highly charged investment strategies requiring ongoing advice when their circumstances suggest a more basic, low cost plan would be more suited to their needs. For some people this will be the right answer, but it won’t be right for everyone.

For a start, if you don’t have, and haven’t had a post automatic enrolment WPS, then the requirement to prove the receiving plan is more suitable than the WPS is redundant. Similarly if the client intends to take retirement benefits immediately after the transfer, the WPS is unlikely to be a suitable destination. These instances are perhaps quite obvious situations where a destination plan, other than the WPS is likely to be suitable, but there are others. 

Some clients will genuinely be experienced investors and /or have a desire for their pension fund to be actively managed. In these cases it’s less likely, although not impossible, that the default fund in their WPS scheme will be the best answer. Added to this group are those clients holding a very strong position on sustainable or ESG investing.

Although IGC’s & trustees now have a requirement to build ESG considerations into their default funds for WPS’s, thus far the changes may not be sufficient for those with the strongest position on this subject. I expect these groups will be quite small, and a client answering "yes" to the question “would you like your pension fund to be actively managed” is not going to be sufficient to rule out the WPS. There will however be some clients that feel very strongly about these factors, and for them the WPS may not be the best solution.

The investment path of the WPS default strategy also needs consideration. This may be particularly relevant for high value cases where available assets, be those from the pension fund or via other means, appear to comfortably exceed retirement income needs. In these instances the client’s objective may be fund growth rather than income, possibly with a view that the pension benefits will be the last wrapper they access. Does an investment strategy de-risking towards a target point or date suit their objectives?

There’s also the question of how long is too long? To explore this, imagine a pension transfer is taking place for a client who intends to access retirement benefits in 2 years time, and is a member of a WPS arrangement that does not offer flexi access drawdown. Is a transfer to a WPS in this instance the right answer, given we know a move to an alternative plan to access benefits will be highly likely within 2 years? The consultation paper CP19/25 quotes the need to access retirement benefits any more than 1 year away is not a valid reason to discount the WPS, but that seems quite a short timeframe.

Things to consider before transferring 

There are a number of other issues which may impact the suitability of the WPS as a destination for transferred funds. These include clients with a protected pension age, which will be lost if certain requirements aren’t met with regard the transfer. WPS may not be a suitable solution in some instances.

Finally we have the issue of death benefits. Yes most people will live beyond their WPS membership; they can insure themselves against the risk; and in most instances death benefits should play second fiddle to retirement income needs, but they are a factor, and do need to be considered. If the receiving WPS plan doesn’t offer pension freedom functionality, then the ability to pass funds through generations in a tax efficient pension wrapper is lost on first death. Once again this is perhaps more relevant in instances where the member or surviving dependents are unlikely to exhaust the pot during their lifetime, but these instances will arise.

So while the default option of the client’s WPS may be a suitable destination for transferred fund in many instances, it won’t always be the case, and advisers need to continue to assess which option will provide the best outcome for clients.

About the author

Justin Corliss

Senior Pensions Development and Technical manager

Justin’s first foray into Financial Services was in Australia in 1997 with Commonwealth Bank of Australia working predominately in retail mortgage lending. In 2002 Justin and his British wife moved to Scotland where he worked in broker consultant roles with both Scottish Widows and Scottish Life before spending a brief period as an Employee Benefits Consultant dealing predominately with Auto Enrolment and associated business consultancy. Justin is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Justin has studied continuously since arriving on these sunny shores and holds the Advanced Diploma in Financial Planning including the CeMap and Lifetime Mortgage qualifications. His primary focus is pension planning and he holds the AF3 & AF7 qualifications. A huge sports fan, Justin will happily discuss the merits of the Australian cricket team for hours on end.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.