Workplace pensions and pension transfers

1 July 2021
Fiona Hanrahan and Justin Corliss from our Intermediary Development and Technical Team analyse workplace pensions and pension transfers.

Listen to our latest podcast with Fiona and Justin where they discuss policy statements and legislation around pension transfers, how this relates to workplace pensions and rules introduced by the FCA.

FH: Hi, my name is Fiona Hanrahan, and welcome to our latest podcast today I'm joined by Justin Corliss and we're discussing workplace pensions and pension transfers. Hi, Justin.

JC: Hi Fiona, how are you?

FH: Good, thanks. Policy Statement 20, Dash six, published in June 2020 on the topic of pension transfers, introduced a strengthened requirement for advisers to consider a client's workplace pension scheme for pension transfers. Could you give us a wee bit more detail on this, please, Justin?

JC: Yes, absolutely. And your terminology is spot on. By the way, this isn't an entirely new concept. There was already a requirement for advisers to demonstrate that any plan receiving a pension transfer was at least as suitable as their client's workplace pension scheme if they have one. Now, this new requirement, which came into effect on the 1st of October 2020, goes further and requires the adviser to demonstrate any receiving plan they choose is more suitable than the client's workplace pension scheme.

I just want to point out, though, this is not a ban on using a destination plan other than the client's workplace pension, just new rules to ensure advisers consider the workplace pension scheme more closely.

FH: So when will it be acceptable then to transfer someone to a plan other than their workplace pension scheme?

JC: Well, the first thing to say is that it's always going to depend on the client's individual circumstances and what they're trying to achieve. But in Consultation Paper 1925, which is the precursor to the policy statement 26, the FCA outline a few examples of instances where which they believe are and are not justifiable reasons to discount the workplace pension scheme. So the FCA say you can discount the workplace pension scheme. If the workplace pension scheme doesn't accept transfers in, then I suppose that one's fairly straightforward.

The advice sets out how and why the member will access funds within 12 months and the workplace pension scheme is incompatible with the way the pot will be accessed. And the member can demonstrate, or the member can demonstrate prior evidence of investment activity through an adviser or active investment choices as a self-investor. Now, just a word of warning here, though, okay? That will be a relatively high bar. Simply saying a client has had a stocks and shares ISA in the past or has been a member of their employers DC Workplace Pension Scheme and perhaps set in the default fund is not likely to evidence investment experience to the point that the workplace pension scheme can be disregarded.

Now, that same consultation paper also outlines instances where the FCA does not believe are valid reasons for discounting the workplace pension scheme. And these include if the member is more than 12 months from starting to decumulate, if the member is within 12 months of being able to do accumulate. But it remains unclear if or how they will access a transferred pot at that time or insufficient fund choices. So insufficient fund choices is not being listed as an acceptable reason for discounting the workplace pension scheme.

Now, of course, neither of these lists are exhaustive, but they certainly give an indication of the FCA would like to see workplace pension schemes considered as a destination for most transfers made more than a year from the point of starting to draw benefits.

FH: Thanks for that, Justin. So why have the FCA introduced this new rule?

JC: Well, firstly, if we cast our minds back to a document the FCA published in October 2017 called ‘Our Work on Defined Benefit Pension Transfers’, it included some findings on file reviews the FCA had done. Now, the headline you'll probably remember is that only 47 per cent of advice was deemed suitable, but they also reviewed the suitability of the receiving scheme and fund. And here only 35 per cent were deemed suitable. So that's one reason it's long been an area the FCA are concerned about.

Now, the FCA have also raised concerns that some people have been transferred into complex, highly charged arrangements, which required ongoing advice to manage when perhaps a lower charged governance solution may have been more suitable for the client's needs. Now, workplace pension schemes, which are qualifying automatic enrolment plans, have a charge cap of point seven five on the Default Investment Fund and enjoy governance over this default investment by either the scheme trustees or the Independence Governance Committee, depending on the structure of the scheme.

FH: Thanks again, Justin. So consideration of the workplace pension scheme seems to primarily focus on clients who transfer more than 12 months before they're looking to take benefits. What about those clients who transferred at the point they wish to begin taking benefits?

JC: Well, since February 2021. So earlier on this year, we've had investment pathways, although these are primarily aimed at non advised drawdown clients, the FCA has stated they expect these to be considered by advisers for advise clients, too, and that the comparison has been documented on the fall. So, there's a definite push from the FCA to demonstrate value for money. And it seems this at least partly involves demonstrating why the receiving plan, either an accumulation or decumulation, is more suitable than a low-cost governance solution.

And it's also worth remembering that although there's less focus on this in the policy statements, if the client's workplace pension plan offers suitable at retirement functionality for that client, then this should still be considered where benefits will be taken immediately post transfer.

FH: Thank you very much, Justin.

JC: Thank you.

 

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