Pension switching: Achieving good outcomes for clients

Hey everyone. I'm Craig Muir, and I'm joined by my colleague, Fiona Hanrahan, and we're part of the Pensions Technical Team at Royal London. And thank you very much for joining us on this webinar. Now today, we're speaking about pension switching and looking at achieving good outcomes for clients. But just to make it clear up front, we're not talking about pension transfers. So, this isn't a defined benefit to defined contribution section, which the regulator defines as a pension transfer. No, what we're doing here is a defined contribution to defined contribution which the regulator defines as a pension switch. But there are some lessons to be learned from pension transfers, which obviously the regulators had this huge focus on for a number of years, some of which I think can logically be applied to pension switches too. But before we get onto that, just a few housekeeping rules. If you're watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen, and we'll get back to you with the answer as soon as we possibly can.

Alternatively, you can raise your question with your usual Royal London contact, if you prefer. Now, if you're watching a recording of this, then the chat facility won't be available, and you'll only have the option of raising your questions with your usual Royal London contact. The question we get asked all the time is to do with your CPD certificate. So, what happens there? You'll need to answer some questions after the webinar, and that will automatically generate your certificate. So, onto the webinar itself.

And as you probably know, the regulator has investigated pension switching advice several times, and on each occasion, they actually found very similar issues. So, what we're going to do is we're going to start by looking at what these issues are and how you can avoid them so you can get the best outcome for your client, and you don't fall fool off the Financial Conduct Authority. I imagine you'll know a great deal of what I'm going to talk about, so maybe this will just be a refresher for you, and it may also help to alleviate any concerns that you may have missed something from the FCA. But you know what? There are definitely opportunities for you and your clients in this market. You know perhaps they're old and or even their existing plans have been performing poorly, and maybe they've got relatively high charges, or perhaps they just no longer meet the needs and objectives of a client, as well as another plan may do. Now, remember, the consumer duty will mean you'll need to consider the price and value of your client’s propositions, and you need to avoid foreseeable harm, and this may necessitate a switch. Therefore, we'll talk about the interaction between pension switching and the new consumer duty. I think this is particularly relevant when we think of solutions for target market groups under the Consumer Duty.

Now, for this to be CPD-able, we need to have learning objectives, and they are: document your advice process in line with the requirements of the regulator, identify the relevant risk factors associated with pension switching, and identify current opportunities and potential future challenges for pension switch clients, including the consumer duty.

So, what we're going to do is we're going to start with a bit of a history lesson. Then we're going to look at what the regulator and its old incarnation, the Financial Services Authority, the FSA, had concerns about in the original pension switching thematic review. Now part of the reason why I want to focus on this is that that was the last output from the regulator that solely focused on pension switching. What I hope will become apparent as we move through is that the new guidance we get from the regulator doesn't negate the previous guidance but rather builds on it. Each new piece of guidance tends to assume the good things will continue to be done well, and focuses on what's not being done so well, making advisers aware of that so they can fix it. Now, starting with the first thematic review into pension, switching from back in 2008 and the project was undertaken because well, as you can see in the first paragraph there on the left-hand side, consumers may have been switched into higher charging pensions with features or additional flexibility they did not need.

Now, at the time, they were talking about self-invested personal pension, so SIPPs. I reckon if they did it again today, I'd expect that to be more focused on platforms. But of course, the platform market wasn't as developed at that point. Now, there were lots of consumers who were getting switched from their old personal pensions to SIPPs, where they could invest in a multitude of different investments. But as the regulator pointed out, for many, the additional cost wasn't appropriate, as they didn't actually use the self-investment facility. In fact, most of them were maintaining all of the majority of their fund in the insured part of the SIPP. And hence why they started their thematic review into the quality of advice on pension switching. Now the Financial Services Authority also highlighted advisers were not providing enough justification for the switch or the reasons given were too generic, and, I think at that point, there might have been an element of copy and pasting the reasons why, and therefore, you know, they weren't specific enough for the client. Now, a lot of this might sound pretty familiar, as it sounds a lot like the points raised the Consumer Duty, which talks about price and value, about good client outcomes, and about documenting and evidencing all of this. Now we'll look specifically at Consumer Duty in a moment, as it's central to analysis of pension switching. But before we do, I just want to delve a little deeper into this thematic review.

So, what were the key points from the original thematic review? Well, you can see here unsuitable advice, 79% of the extra costs for no good reason. 40% funds didn't match the client's attitude to risk and personal circumstances. 26% ongoing reviews not documented or not put in place, and 14% had a loss of existing benefits for no good reason. Now, although these stats look pretty damning, and in fact, they were the ones which the financial press focused on at that time. You know what? They do love a bad news story, don't they? The reality is that out of the 500 files that FSA reviewed in their thematic review, only 16%, that's one six, 16% were deemed unsuitable. Therefore, it was actually 79% of 16% which had extra costs for no good reason, and it was 40% of 16% funds not matching the client's attitude to risk, etc. But I think the key point which I've highlighted is the FSA have stated 'for no good reason', which, of course, means there can be good reasons for extra costs and loss of existing benefits. And we'll look at some of these in a few minutes. I do remember, though, there were some pretty hefty fines applied by the FSA to some adviser firms for putting clients into higher charge products without documenting taking good reasons why.

So, five, six years later, in the next suitability review, it was the Financial Conduct Authority, they produced their key issues, and they look really familiar, mainly because they're the same. So, this time, the FCA was getting a bit frustrated and decided to go into these in a bit more detail. Now the reason I am highlighting these is we still have to ensure each and every one of these is covered off when looking at the suitability of the switch for the client. Shortly, we're going to look at these four main concerns in a bit more detail, but before we do, let's look at the most recent guidance we do have, and that's the consumer duty.

We’ve all seen this before, but you know what, it's worth considering this in the context of pension switching, and particularly in relation to some of the issues previously identified by the regulator around pension switching. At the top, we have the consumer principle that a firm must act to deliver good outcomes for retail customers. Now, make no mistake, that's a general catch all by the regulator. Now, part of the reason for it being there is to say to advisers, it doesn't matter if we haven't given a specific directive, or if you're not falling foul of a particular rule, everything you do should be to achieve good outcomes for retail customers, and furthermore, it's not okay to let poor outcomes occur, as long as you're not doing something that specifically creates them. No, you need to act to prevent them happening. Below this, we have the cross-cutting rules, and in particular, the second of these stating that firms must avoid foreseeable harm to retail customers. And then below that, we have the four outcomes of this outcomes-based regime. Obviously, all these things are important, but I think the price and value outcome is of particular interest when thinking about pension switching. We'll revisit these points as we go through, by the way, but please keep them in mind as we explore the suitability of advice issues in a bit more detail as it's really easy to see how they marry up.

So going back to the suitability of advice issues highlighted by the regulator, and first up is extra product costs for no good reason. So, I just want to highlight 'for no good reason', so they're not saying you can't have extra product costs, you just have to be able to justify why these are in the client's best interest. So, they said existing product features weren't utilised or discounted. So, we need to ensure that we've looked at the existing plan to determine whether the objective can be achieved within the current product. For example, if the client's invested in individual funds with a provider you decide that multi asset solution would be better, you need to check the multi asset solutions available in the current proposition while considering that switch. Next is new product features not needed or used. Now again, this harks back to clients going into higher charge SIPPs and then not using the self-investment facility. The regulator actually highlighted at the time that some advisers had used the justification for a switch, again to self-invested personal pensions was because they had 2,000 funds. Well, as the regulator pointed out at the time, this isn't justification, because the client isn't going to use 2,000 funds, but more appropriate funds are identified, that could be a reason to recommend the switch. You see, I look at these first two points from back in 2014 and my mind immediately jumps to target market groups under the Consumer Duty. Next up, many clients will have multiple pots, especially if they've moved jobs frequently. Now, some say the average number of jobs are 11 for each person these days, so potentially 11 different pots, each with their own charge and a different asset allocation. So it makes sense that if we consolidate them, then hopefully they'll end up with some sort of large fund rebate. But there needs to be a clear benefit to the client. And remember, you need to examine each of the clients plans on its own merit to decide if it should be switched. And yes, are you 64 still there? Though it's not known as that anymore. It's now COVs 19/2/2R. you still have to explain why not stakeholders. So, these were the issues identified in 2014.

Now what I'm showing you here isn't from the thematic review of pension switching. Instead, this was proposed in policy statement 20/6, which came out in 2020 and it's in relation to pension transfers. But it's the same regulator, and it covers some of these same issues. Now, rather than the specifically tugging at the why not stakeholder question, the stakeholder pensions weren't particularly cost competitive by 2020. The FCS mantra around destination of transfer funds at that time was, if the client's more than 12 months from decumulating and the destination of the transfer funds isn't the client's workplace pension, if they have one, then the adviser needs to justify why not. And it's very difficult in the consumer duty world to see why this wouldn't be just as relevant for a pension switch. In reference to the cross-cutting rule about avoiding foreseeable harm the Consumer Duty says this can occur when consumers incur overly high charges on a product because they do not understand the product charging structure or how it impacts on the value of the product. So, are there any additional costs? And is the consumer fully aware of these? Can they explain them back to you. Similarly on the charges point, the Consumer Duty also says, 'foreseeable harm can occur due to consumers incurring high total costs of investing, such that the total charges are likely to outweigh the expected above cash returns from the investments.' Now, obviously it doesn't need to include that first column there, ‘keep my guaranteed benefits, because that's particular to DB schemes’. But the comparison of costs from Workplace Pension to other personal pensions is important. Higher costs they don't automatically make the switch unsuitable, but you need to make it really clear what the costs are, and if they're higher, you'd need to have robust evidence that will lead to a good customer outcome, or the device should be not to switch.

Moving on to the second issue, are the investments recommended to the client suitable for the attitude to risk of personal circumstances? Now, obviously this decision is not limited just to the client's attitude to risk. Now first up, you’ll also need to think about such issues as the term to retirement, because investments that are suitable for someone, say, with a medium risk profile, and they've got 30 years until retirement will be different from investments that are suitable for someone with a medium risk profile, but three years from retirement. Also look to see if the clients, other investments or pensions have been taken into account. For example, if the client has a substantial exposure to property in the rest of their portfolio, it may not be suitable to have further exposure to property here. Best practice from the regulator is to check the client's investment knowledge and experience, so for example, have they ever had a stock in shares ISA, what was their experience like if it fell in value? How did it make them feel?

Next one's insufficient account of client’s objectives. Now, when the regulator assesses the suitability of a solution for a client, there are three possible outcomes: It's suitable, unsuitable, and unclear. Now, if objectives are not included, then it's automatically unclear. Now the regulator-stated objectives should be up front and in fact, best practice in paragraph one. That kind of makes sense, as a client's objectives are the most important thing, and anyone reviewing the file is also going to want to see this front and centre. Now remember to define the attitude to risk and be consistent. So, for example, don't say risk rating two on one paragraph, then cautious in another, and then defensive in another. And of course, you also need to consider the client's capacity for loss, which should be done in conjunction with other existing pension assets, bearing in mind that capacity for loss becomes more important the closer the client gets to their decumulation point.

Moving on to the third suitability of advice issue highlighted by the regulator. And you'll notice, straight away, that the regulator, once again talked about 'without good reason', and this time it's with regards to the loss of benefits from the seeding scheme. So just to be clear, the regulator is acknowledging there can be good reasons for a client to give up existing benefits. So, let's identify instances where this may be suitable for the client. First up, they're talking about valuable guarantees being lost. So, think about guaranteed annuity rates, or GARs, as we normally call them. So, what could be a good reason why it might be okay for a client to give up their GAR. Well, I suppose if they're adamant, they're not going to take up the guarantee, you know, perhaps it kicks in at a set age, which many of them did, so, you know, 65 or even 70. But that client needs access to their pot of money earlier than this. Consider what the fund size will be. Now, the client may be in a really poorly performing fund, which means their ultimate fund size will be small, and that guaranteed annuity rate, which applies to the small fund, may be less than if the client was moved to another investment solution with a greater performance, and then they still looked at a whole of market annuity solution. And of course, what about spousal benefits? Many pensions with a guaranteed or new to rate don't offer spousal benefits. And if this is imperative for a client, then their current plan will not match their needs and objectives. And just a quick reminder, APTAs and TVCs are only required where there's a safeguarded benefit that is not a guaranteed annuity rate. Now, from a Consumer Duty perspective, this falls into avoiding foreseeable harm. Yes, we've just looked at some instances where it may be suitable to switch, but the important point here is doing the investigation first, to see if there are benefits lost on switching, and the analysis to see if the benefit switching outweighs any foreseeable harm of them losing it out.

The next one, I think is pretty rare these days, but there will still be occasions where clients are investing with profits but getting maybe no or very little reversal bonuses, and their potential terminal bonuses are plummeting year on year. Now, Fiona will talk a bit more about the type of analysis the regulators expect, and just for completeness, in a few minutes time.

Protected tax free cash next. Now, this can be really valuable and try and preserve this as much as possible if you do come across a client with it. This isn't a safeguarded benefit, so additional permissions aren't required to advise on it. But just remember, there were changes to tax free cash from the budget in 2023 and I don't have time to go into these now, but we do have another presentation which covers these changes, as well as the changes which came into effect in April 2024, if you're interested in the session on lump sum allowance, the lump sum and death benefit allowance transitional arrangements, then please let us know, and we can set up another session for you on this subject. Finally, ongoing reviews not documented or not put in place. Now, the client should be made aware that the policy needs to be reviewed to make sure that it continues to meet their needs and objectives, and to avoid issues such as portfolio drift. Now portfolio drift may not be so much of an issue where the client makes use of a product's automatic rebalancing facility, but reviews also provide an opportunity to reassess things like death benefit nominations, changed personal circumstances, changes in market conditions, etc. Now, even if the client doesn't feel these reviews need to be carried out on an annual basis, remember they can be arranged on an ad hoc basis. Now, in instances where the clients ask for the switch to be set up on a transit transactional basis and they've said they don't want ongoing reviews, make sure the importance of the ongoing reviews is highlighted, possibly even think about getting the client signing a disclaimer explaining why they don't want them.

Now, regarding the final point, if you've agreed with the client to carry out ongoing reviews, then the onus is very much on the advice firm, rather than the client, to ensure these happen. And of course, we've just had the FCA feedback on this with the findings from the ongoing advice review. On the whole, the findings were actually positive, but the fact that the FCA did a whole study on it is telling. There's still an important point here about the ongoing review being offered or discussed in the first place, as the FCA reviews, looking at whether the reviews clients were paying for were being delivered, not if they were offered in the first place. The other point I'd raise here is the granularity of what is and isn't involved in that review. How well is that explained to the client? Because this all points to the value part of the price and value outcome. Do clients know exactly what they're paying for? Actually, our head of compliance has a great saying that he rolls out regularly around this which is, ‘informality leads to ambiguity, which leads to liability’.

So, what about switching and ongoing adviser charges, and is it appropriate for a client to be charged a new fee for the switch, or should that just be part of their ongoing service? Well, so the answer to that is down to what the advisers disclose in relation to what the service provides. The ongoing adviser charge will cover a range of services, and these can vary between firms. What you see on the screen there, that actually comes from FCA's platform market study. It states, ‘if ongoing advice charges do not cover the cost of assessing the benefits of switching, advisers need to be able to justify this.' Now for me, this comes down to disclosure, and the need to be clear about what clients are and are not paying for, and the importance of clearly outlining what services that the ongoing adviser charges are paying for.

Now, the regulator gives us all access to the retirement income advice assessment tool in March 2024 it's also known as their RIAA. Now this is the tool which they use to assess advisers’ retirement income advice. I know we're not talking about retirement income advice today. However, there are many pertinent parts of this tool which you may wish to familiarise yourself with for pension switching because I think they're hugely relevant, and I'm pretty sure they'll use many of the same questions when assessing pension switch cases. For example, this is section seven I've pasted here, and it's on information they expect you to obtain from a seeding scheme. Again, although this is used for retirement income advice, I think they'd expect all the information to be gathered and held for pension switch cases too. Even if you just look at the first three sections about product details, you know the FCA reported as part of their term income advice assessment that some adviser’s firms didn't hold the prototype switch from or the product owner, or, in fact, the provider’s name. They said it was therefore impossible to determine whether there were benefits or guarantees being given up. So please make sure you're obtaining this information, and all the other information highlighted here.

And in part A of the RIAA, the tool highlighted what information should be gathered for the proposed new scheme. You'll note the first question, which is, actually it's the fourth line down. I've just highlighted it there under Product Details, is this the client's workplace current workplace pension? And this is something we've already mentioned in this session. If you're switching a client, you need to consider the workplace pension assuming they have one as the destination. You'll also note here there are a number of questions related to platforms and the say DIMs, they're actually referring to DFMs or Discretionary Fund Managers here, the reason being, the FCA are concerned about additional costs for no good reason. Again, remember, we highlighted this earlier in the session, and they're also concerned about value for money. As I mentioned, there are lots of parts of this tool, which, if you are doing switch business, it would be appropriate, and a good idea to familiarise yourself with this.

Moving on, to think about some questions to ask yourself about foreseeable harm. If your client is approaching retirement in the next few years is likely to start taking an income, it's difficult to suggest their income requirements are not foreseeable. You know, switching to a cheaper product that cannot support their likely income requirements, for instance, can therefore be considered a foreseeable harm unless, of course, they're saving more than offsets that cost and inconvenience of a further move in the near future. A key part of the consumer duty involves monitoring and evidencing so it's important to ask questions and document your answers. Is it appropriate to leave clients assets on all style pensions that cannot offer pension freedom options, or to leave clients on legacy products where service standards are poor, or where technology upgrades are likely to impact accuracy and timeliness, or for some clients to miss out on your core CIP because it's not supported by the Legacy product or platform they're sitting on. Each of these could necessitate a switch. And it's not just new or changing customer needs that are potential for foreseeable harm. Failing to act where issues surface about products or solutions your existing customers are sitting in is also a problem. And I'm going to quote here the FC actually says, ‘firms should avoid causing harm to customers by making sure their customer support does not impose delays, distress or inconvenience’. So, watch out for that one. If you are aware of issues with providers that you rely on, you fail to act, then this may be construed as causing harm. When you can reasonably foresee a scenario, then this must be considered an arriving at the recommendation made. Various potential scenarios will have to be documented, and their importance weighed in terms of materiality and likelihood to deliver the Consumer Duty expectation to demonstrate good outcomes. Okay, I'm now going to pass you on to Fiona, who will take you through the rest of this webinar. Over to you, Fiona.

Thanks very much, Craig, and hi everyone. So, let's have a look at some of the advantages of switching for clients, or as we've termed it here, the drivers for change. And ideally, when you're thinking about the drivers for change, the regulator has stated you should look at this much more holistically and therefore look at a combination of benefits for the client. So, let's work through this non exhaustive list here to identify some of the areas needing consideration. So first of all, then, the aim of establishing the client's objectives is to understand their priorities, their plans, including any relevant dates, and you know any amounts to achieve these as well as what motivates them. Objectives shouldn't be generic but should be personal to every client. And if the current pension scheme doesn't match the client's needs and objectives, or maybe it does just now, but won't shortly, then you know this on its own could justify a switch. And remember that the regulator has a suitability assessment template, which you can follow to identify if the switch is in the client's best interest or not. And part of it covers charges, and in fact, provides examples of reasons why a client may benefit from a switch even if it is into a higher charge product. So, if anyone's thinking that a switch always needs to be to a lower charge proposition, the regulator does make it clear that there are instances where the client could benefit from a switch to something that's more expensive, even, you know, if that actually better meets the client’s needs and objectives. So, when reviewing a switch to a more expensive scheme, make an objective assessment about whether there will be a real benefit to the client, and if that outweighs any additional charges. Remember, price and value is one of the four key outcomes the FCA are wanting you to consider as part of the consumer duty, as we've mentioned, and we all know the regulator is keen for you to consider value for money. So, let's take a closer look at this and the interaction that has with charges. And first up, we'll look at Cobb's 9A.2.18 and this rule is really really important, and I don't think all firms have spotted it or taken it into account, which is potentially a problem, as it's quite impactful. The wording of this rule is a bit waffly, but it essentially is saying that if something is cheaper or less complex but still meets the client's requirements, then this is what you should recommend. But you can turn that around, and if you're recommending solutions that are more expensive or more complex than something else that meets the client's objectives, then you know that would be unsuitable. And this is mirrored in one of the questions the FCA uses in its file review approach, and that is, the client has incurred additional cost without good reason. And I'm sure you'll see how important this rule is. It places a clear onus on you to consider costs when advising clients. It doesn't mean you have to recommend the lowest cost, but it does mean that if something is more expensive, then there needs to be a good reason for it. There needs to be value for money for this additional cost. And the more you think about this rule, the more significant it really becomes. It effectively sets low-cost solutions as a benchmark. And if higher cost solutions are recommended, there needs to be a good reason for that. Then first of all, that it's relevant to the client and commensurate with that additional cost. And there needs to be good reason for that additional cost, otherwise the recommendation is unsuitable. And this might sound harsh, but you know, let's think of it another way. Tax is effectively a negative return. All clients, when investing are implicitly looking for a return, and tax works against that client objective. Therefore, a less tax efficient solution is less effective at meeting the client's objective, and therefore unsuitable. Advisers are really good at automatically and routinely looking at the most tax efficient solutions for clients. But costs are the same as tax. They are a negative return working against the client's objectives. So, you should automatically and routinely consider costs in order to provide suitable advice. The other angle to look at this is that if the new solution meets the client's requirements, then it cannot be unsuitable if it's a lower cost. this might sound obvious, but you know, it's a key point of reassurance. Any move to a lower cost solution, unless there are some key additional benefits of the existing arrangement that are relevant to the client, is always going to be suitable. So, some of the questions to think about asking are, what precisely does the receiving scheme offer that a less expensive alternative does not? What value does the customer get by paying more? Does that value at least make up for the additional charge? Are the receiving schemes funds likely to be able to outperform the cheaper scheme options by at least the amount of that additional charge? And how has this been analysed? If the file does not contain sufficient information to be able to tell whether the additional charges can be outweighed, then the answers to these questions are likely to state that there is not enough information to assess the answer completely. This may make the final rating of the advice unclear. In this case, you need to provide further information to show that the advice is suitable. You should check that this further information addresses these concerns adequately, and if not, the case, rating is likely to change to unsuitable. When it comes to clear disclosure of additional charges on the receiving scheme, that's not sufficient to overturn these requirements. This is completely in keeping with the consumer duty. You need to check that more expensive schemes are truly in the client's best interests, and you can evidence why they're likely to result in good outcomes for your client. Otherwise, the advice should be not to switch. Now you need to consider all types of charges, so not just the annual management charge or the total expense ratio. Some of these won't apply these days, but you may come across older plans where there still are things like a bid offer spread. So, you need to consider all the charges and if there will be future loyalty bonuses or large fund discounts, etc. The next one we're going to look at is fund performance. So, compare the performance of the seeding schemes portfolio with the new schemes. And the regulator expects you to at least compare over one, three and five years, and ideally the last five discrete years too. Now they're not going to be stupid about this. If you've identified a fund or portfolio of funds as being the most suitable to match the client's objectives, attitude to risk, etc, and there isn't five years performance, then you know that's obviously okay. Just use the longest term possible. Best practice is to look at the term to retirement and use that term for past performance as well as one, three and five years. And once again, that needs to be meaningful, because if the client's 32 and has 35 years to normal retirement date, you know, we don't need that 35 years past performance and analysis covering a few economic cycles would likely suffice. And remember, this is one thing that kind of sometimes gets forgotten. The regulator would not expect a client to be left in a poorly performing fund. So again, this could be an instance where it's suitable for the client to switch.

Okay, let's move on to any loss of benefits. We've touched on benefits lost from the seeding scheme already. When we looked at the issues raised in the 2013-14 review. But remember, if the existing pension scheme has a guaranteed annuity rate or GAR attached to it, then transferring away from the scheme means that they'll lose that guaranteed annuity rate. GARs are a safeguarded benefit, and although the adviser doesn't need to be a pension transfer specialist to advise on them, the FCA requires the firm to have transfer permissions to conduct that transfer. a member would need to fully understand the reason why this would be beneficial to them. And of course, there might be other reasons why you would lose valuable benefits, for example, with profits bonuses or protected tax-free cash as well. You may not come across with profits cases these days, and even if you do, they're likely to be unitised with swap, but just for completeness, I wanted to remind you what you would have to do if you come across these as there are certain elements the regulator would like you to look at before deciding whether the client should switch out or not. So, if you're requesting information on traditional with profits, make sure you ask for details of the guaranteed sum assured, the reversionary, or sometimes called declared bonuses, which have been applied, as well as any terminal bonus, then make sure you get the terminal bonus as separate figures as that's not guaranteed. And talking about guarantees, remember the guaranteed sum assured is only guaranteed if the client takes their benefits on or potentially after their selected retirement age. If they take their benefits early, then that guaranteed sum assured needs to be recalculated to the earlier date. So, this could mean a reduction in the sum assured and those associated bonuses. You also need to check to see how the with profits fund has been performing. Is it actively managed, and of course, one of the most difficult things with with profits, is that you can, you know, struggle to get this information. You can try getting the PPFM or the principles and practices of financial management, which all providers of with profits must create, but also trying to get a fund projection, the performance history, the asset allocation, as well as the charging structure. And for those of you who have access to AKGs with profits financial strength reports, you'll get the performance history and allocate asset allocation there. In fact, if you use O and M, they also have the AKG with profits reports for each provider on their system. And I know the charging structure can be notoriously difficult to get. Typically, you'll hear some providers say their charging structure is built into their bonuses. And one way to get around this, when you run a switching report from the likes of O and M or select a pension, you know, as long as you have the date of the transfer value, the transfer value, the projected fund value, the selected retirement date, and the growth rate used, then they'll tell you what that RIY is, which roughly equates to that annual charge.

So, let's have a think about switching to workplace pensions next, which we've mentioned, and this is an attempt to reduce the impact ongoing charges could have on a client's ultimate fund value and therefore their retirement income. So, the FCA strengthened their position on the requirement for a firm to consider a client's workplace pension scheme, if they have one, as a destination for any transferred or switched funds. We looked at this earlier when we talked about the cover sheet required for pension transfers that mentions the charges in the workplace pension scheme compared to any other proposed destination for those funds. And although this isn't necessary yet, and most stress yet here for pension switching, I think it has relevance for pension switches too. So why not get ahead of the game and start considering the workplace pension scheme as a destination for the switch? Remember, if your client is in a default arrangement within the workplace pension scheme, it will have a maximum charge of just 0.75% and will come with the added security of some form of governance. If it's not suitable, then explain why, but at least you've checked and documented why it's not suitable. There's quite a clear tie-in here to the price and value aspect of the consumer duty. In fact, I think this is a pretty good example of the difference between the consumer duty and previous regimes like treating customers fairly.

There isn't a specific rule about considering workplace pensions and pension switching like there is in pension transfer. So, you know, it might have been possible for advisers not to consider them in the past without falling foul of any specific rules, but in a consumer duty world, where there's an onus on the adviser to create good member outcomes, there's very much a compulsion on advisors to consider these if they would be most suitable for the client. In the FCA's policy statement, PS 20.6 on pension transfer advice, they suggested a table, which, you know, we looked at earlier, showing the seeding scheme, the client's workplace pension scheme, if available, and the new scheme. The FCA table, while very good, could perhaps benefit from a bit more detail in pension switching cases, and could benefit from showing some of the other points we've listed here. I'd imagine different firms will have other aspects they wish to cover too, so this isn't a comprehensive list. Part of the benefit of having tables like this in the file is that it helps ensure that the file tells the story of the client, what they're trying to achieve, why the existing scheme may not be the best way to achieve those goals, and how, based on reasonable evidence and assumptions, the new plan is more likely to achieve them. So, let's take a look at financial strength now, or next. Any of these ratings companies can be used to compare providers' financial strength but just a word of warning, at Royal London, we do not have a financial strength rating from Standard and Poor's. We have a counter party credit rating instead, Standard and Poor's provides two types of ratings, a counter party credit rating or CCR and a financial strength rating. Ask your BDM if you want more information on these. Incidentally, and this is just for completeness, as these are getting pretty rare these days, but providers can have two different financial strength ratings, one for the overall company and one for their with profits fund. So, if you do come across any old cases where the member is in a with profits fund, you'll need to consider the financial strength of the with profits fund, which could be very different from the overall financial strength of the provider. Typically, you can get these ratings from Best Advice systems or independent product databases.

Now let's have a think about death benefits and future drawdown, and we'll look at these together, because you know, they're interlinked. And again, you probably won't come across some of these old schemes anymore, but some of them had pathetic benefits or return on death, such as a return of premiums plus 5%, or return of premiums plus 3%, or potentially even worse, simply a return of premiums. Now clearly, if someone is in serious ill health and they're in one of these old plans, then certainly think about switching them to a more modern return of funds scheme, assuming, of course, this is going to provide a larger benefit.

The regulator has come across cases where the justification for switching was because the client was in serious ill health and they were in a return of premiums policy, so moving to return of funds policy would definitely provide a greater return, and the regulator was satisfied this was a valid reason.

On a separate point, this is not an exhaustive list, and justification must be tailored to the client. For example, death benefits may not be important if there are no dependents. On the other hand, if there is a spouse and/or dependents, then consider involving them in legacy planning, as this can result in a much smoother and better outcome. And then the last part there around pension freedom functionality. Up until recently, we used to talk about moving plans within two years of the date of death, and how that could give rise to potentially inheritance tax applying to the plan, and this was mostly talked about in relation to defined benefit transfers, but in theory, it could impact pension switches too. However, given the plan is to bring pensions into scope of inheritance tax from the sixth of April 2027 that doesn't seem so relevant anymore, but I'll tell you what is relevant, access to pension freedom functionality, and we'll tell you why. When the lifetime allowance was replaced by the lump sum allowance and the lump sum and death benefit allowance, it did mean a significant shift. The regulator moved from measuring virtually all benefits, or not the regulator, sorry, the HMRC, moved from measuring virtually all benefits crystallised to only measuring tax free lump sums taken by the plan holder or their beneficiaries. A key point within that is that moving into income drawdown or beneficiary drawdown does not use up any of these allowances. However, if pension freedoms aren't available, then the only death benefit options potentially available to the beneficiary are lump sums or an annuity. If the beneficiary is younger, then an annuity might not be a realistic option. So, if you're left with a lump sum that's measured against the lump sum and death benefit allowance, potentially leading to a tax charge. So not having pension freedom options available on a plan may result in tax charges for the beneficiary on death of the member that could have been avoided if Flexi access drawdown were available. In the past, the guidance was that moving to access drawdown wasn't a satisfactory justification for a switch, unless your client was imminently about to access pension benefits. But now that's no longer the case. If pension freedoms aren't available, this can be a valid reason to switch, and in fact, for larger fund values could, they could be the primary reason for switching.

And finally, consolidation. of course, what we often consider as justification for switching is consolidation, where a client has multiple pots and they could perhaps get a better proposition and charge, possibly with a large fund rebate by switching them to another proposition and provider. Now remember, the regulator has stated we need to look at each and every plan on its own merits, and it might be that not every plan benefits from a switch. So, for example, one plan may already have a low charge, and the investment solution matches the client's attitude to risk, capacity for loss and objectives, etc. However, it may still be appropriate to switch the other plans. Of course, in this instance, you'd need to consider switching to the plan which has a low charge and perhaps consolidating the client's other plans within that one. the regulator has highlighted that consolidation of pension schemes can be more of an advantage to the adviser than to the customer by reducing the administration involved. So, there should be a, you know, a demonstratable, or, you know, an advantage able to be demonstrated for the customer if schemes are to be consolidated to a more expensive policy. And consider if customers have a real demand for less paperwork via consolidation, and if that's enough to justify a more expensive scheme.

So, we were thinking about where are the opportunities and drivers for pension switching? And we think that there are a number of forces driving the need to consider pension switching for clients. First up is prod and consumer duty. We've grouped these together as one flow along from the other, and they cover many of the same points. Unless all of your clients' needs and objectives are the same when you're offering the same service to all of your clients, Prod, 3.3.12, and of course, the new consumer duty probably means you need to review, segment, and in order to get to a granular level, probably sub-segment as well. So, if you're segmenting clients into different target market groups, and for each of these target market groups, you have a defined solution and service, there's a high likelihood you're going to find some of your pension accumulation clients will be mapped to a solution which doesn't match the overall needs of that specific target market group. Maybe there's enough flexibility within the current plan to change it, but if there's not, then there's a good chance you'll need to undertake a pension switch to ensure you're complying with prod and the consumer duty requirements. There may be clients who've moved jobs a number of times, and now have several dormant pots with old employers. They may even have an ongoing fixed charge and other high charges, which are effectively reducing the value of that pot over time. These clients are likely to benefit from a switch. There may be dormant clients who your firm haven't heard of from a few years, and, you know, they just wanted their pension set up on a transactional basis. It might be a good time to try and reconnect with them, especially on the back of recent market volatility. Helping them now when they perhaps feel anxious and nervous about the state of the world and the impact on them, could be invaluable.

They may even be reviewing their retirement plans, or perhaps they switch their funds at the bottom of the market and are now regretting that decision and the poor investment performance, we know that actively advised clients not only have more money, but also less anxiety, as well as some other non-financial benefits. Talking about these benefits could really help. And there's the review point. Now we're not covering reviews today due to the time, but reviews are often the point that they need for a switch is identified. So, it's important to highlight the benefits of ongoing reviews to clients. Then there's poor service from providers, so maybe there are better solutions out there for your firm and clients. Remember, providers are required to issue wake up packs from age 50, and then at least every five years until the entire pot has been crystallised. So, there is an action here. Any client from 50 will receive this wake-up pack. Therefore, there's potential to re-engage with clients and arrange a review meeting with them. Just a word of warning: the message in the wake-up packs is heavily geared towards directing consumers to money helper and therefore make sure you don't lose them to guidance when advice is really required. And finally, if you know when your client's mortgage will be paid off, and if you don't, you could always ask them, then this could mean they have spare capital, which they could use more tax efficiently by increasing contributions to their pension. Again, another great excuse for contacting clients and discussing their pension plans, which may include the benefit of switching.

Now there's our learning outcomes. I do hope you found the webinar beneficial, and you managed to get something out of them. Hopefully you feel we've met these learning outcomes. If you have any questions about this presentation or would like to know more about Royal London and how our proposition can help you. Then speak to your usual Royal London Business Development Manager or account manager. Remember, after the webinar, you can answer the CPD questions, and that will generate your CPD certificate, but it may take up to 24 hours to generate so don't be alarmed if you don't see it immediately. Also, within the next few days, a PDF of the slides will be available on our CPD hub, along with a video of this session. And that just leaves me to say, on behalf of Craig and myself, thank you very much for listening. And finally, the legals, because you know you wouldn't want to miss those. And that just leaves me to say, thank you very much for your time. I hope you find it useful and see you next time.