Guidance on Pension Transfers, FCA Guidance PaperÂ GC 20-01
This analysis should be read after reading the actual 93 page guidance paper, if you can stand it.
This is 93 pages of facts and figures and data and opinion that comes under the heading of Guidance Consultation, and comes at a time when nearly all DB transfers have ceased, due to PII, FCA action amending the permissions of over 700 firms, and thirty enforcement cases launched against the industry.Â You might say â€œstable doorâ€ but this is not for them, but rather for us in the future, for the trickle of DB transfers that may keep coming, mainly, surely only, due to shortened life expectancy prior to transfer.
A large amount is a walk through familiar footpaths to the base of the mountain, then we ascend slowly only to find the summit well trodden and the view far from clear.Â You might ask why some extreme examples are taken that donâ€™t necessarily reflect the grey of daily life for most IFAs recommending transfers, but there is almost nothing that you can disagree with â€“ except a solitary comment in 5.27 about death benefits â€“ more on that later.Â Â
There is a degree of interpretation about the rules, that we are all used to, and it is interesting first of all to get clarification for employers about what exactly constitutes arranging contracts in annex 2.Â My guess is that any sensible employer or pension trustee will make sure that in future members are referred to more than one source of adviser â€“ all good stuff for IFAs.Â After all, there are 6,400 DB schemes in the UK, and only 12,000 advice firms.Â Even if you only allow for the 1,013 open DB schemes, the statistics are weighed towards any local adviser being asked for advice.Â Â To add a bit of seasoning, in 2.4 FCA make it clear that Financial Services firms with DB schemes who have their own in house advisers should not use their own advisers to offer advice to members or deferred members of their own scheme.Â As most IFAs know, rich pickings are often found in the deferred members of the big three banks Lloyds, RBS, Barclays, and the large life offices.Â This is because these schemes in particular have matched their liabilities with bond assets â€“ leading the tiny yields now on offer in bonds to force a dramatic rise in transfer values â€“ often above 50 times the value of the annuity, and in one case we saw last week, 67 times â€“ making the guarantees available inside the DB scheme look very expensive.
There can surely be only a few dozen or so firms still in the business of conducting transfers.Â Â So where will the customers go?Â Â There is a disconnect between what the schemes want (to get rid of the liability by offering high transfer values) and what the Regulator wants - and there is no mistaking that.
Stats on missales
69% of those who got advice, transferred.Â The lessons are clear to all long in the tooth in this industry.Â In our experience, IFAs turn away clients time and again but fail to record this fact, simply putting the phone down, or ignoring the enquiry as irrelevant.Â And they cannot be bothered to record it!Â It is important that statistics are recorded to show how many clients you actually say no to, and, as any foreigner will tell you, the English (in particular) have more ways of saying no, than the Eskimoâ€™s have words for snow, and none of them involve the actual word NO.Â So get smarter with your regulatory replies, and keep track of those to whom you say, â€œwell, possibly, Iâ€™ll see what I can do, and thank you so much etc etcâ€¦.â€when you really mean the complete opposite.
As ever, IFAs who check their own files are the losers.Â The perceived economy and price saving just brings the risk in house.Â It should be mandatory for all IFA firms to get their advice checked externally, by an independent body, but for the time being it remains more like common sense, and if you go against it, do so at your peril.Â
FCA deliver an aggressive reading of the capital adequacy rules, reminding us repeatedly that the rules are the bare minimum only.Â Rules give us all certainty, but there is precious little certain in this report.Â One cannot but help wondering why the PII crisis is not mentioned in this report â€“ not once, nowhere.
FCA do put a shot across the bow wave of some PII insurers â€“ saying that some have asked for transfers to be referred to them in advanceâ€¦.FCA warns that they â€œmay be at risk of providing advice on a DB transfer and as a result acting without requisite permissions.â€
FCA are quite clear in 2.11 about the two primary activities involved in a transfer.Â
These two matters are indivisible and cannot be treated separately.Â The advice fee cannot be contingent on the transfer.Â Many hours can be wasted on the blogs here, and many suggestions have been made there to find work arounds.Â But these are all work arounds, and should not be entertained, as any subsequent threat of disclosure by the customer would make your life very awkward in years to come.Â Â
FCA confirm that SSAS advice is unregulated â€“ somewhat to my surprise.Â Itâ€™s hard, if not impossible, to deliver ssas advice without advising directors personally, and of course you have to get counterparties to help set up the SSAS, and they are likely to want you to be a regulated firm.
Limited advice on pension transfers:Â You must still assume NOT suitable and only advise in the negative â€“Â â€œSir, despite this assumption it will still be in your best interests to transferâ€¦.â€
ered transfer advice â€“ as you should know already.
Introducers -Â To be clear: never use the FF supplied by your introducer, without checking direct with the customer first.Â This is pretty much mandatory here, and should be extended to all introduced business, and the standard is likely to apply in the future.
So what about the 5.27 comment on death benefits?Â Â
Nearly all pension transfers are driven by a desire to retain assets beyond death, and the FCA are right to point out that level or decreasing term assurance might just as easily satisfy the need, but the FCA author casts aside the ultimate solution of whole of life insurance like an unwanted fish describing it as â€œwhere the client would be charged for benefits they might not needâ€â€¦what benefits might the author be referring to?Â Yes, whole life contains savings, but these savings are used to keep the premium level during an assumed lifespan â€“ hardly â€œunnecessaryâ€ and of course whole of life is the only other solution that will deliver guaranteed benefit on death â€“ if that is what you are looking for.Â Weâ€™d prescribe a training need on whole of life insurance if that was an IFA writing.Â Â
Capital retention is the big driver for the vast majority seeking a pension transfer, yet time and again the FCA revert to income comparisons and emphasise the guarantee of a lifetime income against an uncertain future fund in private hands.Â They have a point, but they relegate the capital preservation need to the bottom drawer of the desk â€“ and to the bottom of the list of priorities for the â€œaverage clientâ€.Â All well and good, but this doesnâ€™t satisfy experience â€“ where nearly all clients want capital perseveration beyond death as a central aim.
In this part the FCA also suggest that â€œdecreasing term may more closely match the shape of a decreasing fund value, once accessedâ€Â assuming that the transfer is designed to run the fund down to zero.Â Well not many run their funds down to zero.Â Personal pension rights can be transferred on death down a generation tax free before age 75 â€“ a key benefit that is discounted by the FCA in 5.25:Â â€œThe tax advantages on death before age 75 are unlikely to benefit most consumers so you should not overplay these.â€Â Â
This guidance paper reads as guidance on transfers which should â€“ remember this-Â be assumed to be not suitable except in exceptional circumstances, and that much at least, is exactly as it should be.Â