Policy Statement 20/06 or, to give it its full title "Pension transfer advice: feedback on CP19/25 and our final rules and guidance" is a huge 149 page document, announcing significant rule changes around pension transfer advice that will come into effect on 1 October 2020. We have covered most of the matters mentioned in the paper in the first four articles of this series.
You can read our previous articles here:
Part one - contingent charging ban
Part two - abridged advice
Part three – workplace pensions
Part four - just one more thing?
In this part five article, the final of the series, we will mop up the few remaining items not already examined.
There are some minor changes to the assumptions used within TVCs which will be effective 1 October 2020.
Estimated transfer values
Firms can give provisional advice where only estimated transfer values are available, in cases when ceding scheme arrangements are expected to be changed or replaced by another scheme.
In these circumstances, the ceding scheme usually requires the scheme member to provide an indicative decision about opting into the changed or replacement arrangements. The scheme then uses this information to determine final transfer values.
Members need to be able to make an informed decision based on the estimated transfer value but the advice is only provisional at that stage.
Pro bono advice
Firms can offer pro bono advice in exceptional circumstances to consumers who fall outside the contingent charging carve-outs.
Firms should refer to the Handbook guidance that sets out the type of situations in which firms may offer advice and related services free of charge. In these cases, the FCA expects that the advice will be free of charge, whether or not it results in a recommendation to transfer or convert, the overarching principle that applies throughout these new rules.
On the same principle, firms paying introducers for referrals must pay the same introducer fee regardless of whether the advice is to transfer or not.
Guidance where two advisers are involved
If you are giving DB transfer advice as part of two adviser model, where the other adviser is providing the investment advice, the APTA for a specific client should be no different than if you were giving the investment advice on the destination. You will still need to use the relevant information about the proposed destination scheme in your APTA.
If you do not know the ultimate intended investment destination or the other adviser suggests the funds will be held in cash initially and invested later, then you won’t be able to determine enough about the proposed arrangement to make the comparison between the ceding scheme and the proposed arrangement in APTA and not in a position to make a recommendation.
As the client has a separate investment adviser, you should not comment on the merits of the intended investment explicitly. If you do, you will carry some responsibility for the investment advice as well as the DB transfer advice. If you consider that a transfer could be suitable with a different choice of proposed arrangement, you should liaise with the other adviser.
Guidance where the client is a self-investor
Similarly, when you give DB transfer advice to a self-investing client, you still need to consider the intended investment in APTA. If you do not know the intended investment destination, your APTA will be incomplete as you have not considered the proposed arrangement. For example, you need to know the underlying investment choices and charges. So, you will be unable to make a recommendation.
As the client is a self-investor, you cannot comment on the intended investment explicitly. However, if the APTA shows the client’s choice of proposed arrangement results in outcomes that are not in their best interests, you must recommend that your client should not transfer.
Incentives / conflicts of interest
The rules ban certain arrangements between authorised firms and any other persons, including any overseas person, with whom there could be any potential for a conflict. These arrangements are banned if they could give rise to an incentive to an authorised firm to advise or arrange a transfer or conversion or could otherwise be used to circumvent the rules banning contingent charging.
Pension sharing orders
The Department for Work and Pensions (DWP) has confirmed to the FCA that pension sharing orders are not covered by the requirement to take ‘appropriate independent advice’. Accordingly, the FCA takes the view that this means advisers are only advising on where the funds will be invested, not on the transfer itself. So, charges for advice about the receiving arrangement for a pension credit awarded under a pension sharing order are not included within the ban on contingent charging.
HMRC’s rules on unauthorised payments still prevent payment for transfer advice being made from a different pension product.
PTSs must undertake a minimum of 15 hours CPD each year, focused specifically on pension transfer advice. At least 5 of the 15 hours must be provided by an independent provider external to any firm that employs or contracts services from the PTS, and a minimum 9 of the 15 hours must be structured learning. Where a PTS completes CPD in relation to activities other than acting as a PTS, for example retail investment adviser CPD, this must not count towards the PTS CPD requirement.
Cash flow models
Cash flow models remain optional. However, where used they must be presented in real terms and include a stress test. Firms should note:
“Mandatory stress-testing scenarios may not provide individual consumers with the information they need. So we consider firms are best placed to consider the most relevant stress testing scenarios for their client.”
The associated guidance paper (GC20/01) states “For example, you could illustrate the effect of a significant fall in the markets soon after a client starts taking withdrawals from a fund”.
If you use cashflow modelling, the assumptions used for investment returns must be consistent with the investment choices and should include the full charges that your client will pay.
We would remind firms that there are rules relating to growth assumptions on projections, including cash flow models. We covered this in a previous article.
Guaranteed annuity rates
From 1 October 2020, the glossary definition of Guaranteed Annuity Rate (GAR) includes retirement annuity contracts (RACs) that contain a minimum guaranteed income.
In practice, this means that firms should treat RACs with a minimum guaranteed income, for example some conventional non-profit or with-profits contracts, as GARs. The same requirements, permissions and protections that apply to GARs will then be applied to these RACs. The FCA has clarified that a minimum guaranteed income excludes fixed or guaranteed benefits in an individual pension contract that replaced similar safeguarded benefits under a defined benefits pension scheme.
It also excludes entitlements to a lifetime income paying a GMP that results from contracting out of the State Earnings Related Pension Scheme and a defined benefit minimum that accrues or may accrue at the same time as money purchase benefits under a pension arrangement. The FCA considers that there is more complexity in assessing and advising on these arrangements, so advice must be given or checked by a PTS and include a TVC and APTA.
There will be new data required in relation to transfer advice and PII. Accounting Reference Date (ARD) forms will change from 1 October 2020.
The definition of ‘pension transfer’ is being changed and firms should use the new definition for reporting PSD from 1 October 2020.
SUP 16 Annex 20 Part 2 sets out guidance on the definitions for PSD reporting. An individual pension transfer is defined by the Glossary definition of a pension transfer. As some types of transfer will be removed from the definition, these will no longer be reported as an individual pension transfer. Instead, these transfers should be reported under the relevant heading for the product being sold.
The FCA is making changes to the data it collects on professional indemnity insurance (PII).
All firms that are required to complete Form E (PII self-certification) in the Retail Mediation Activities Return (RMA-M), or forms FSA031, FSA032 or FIN-APF, should read Chapter 6 of PS 20/06.
If you have been following this series of articles, you will know that it has taken five articles to do even modest justice to the content and implications of the rules that will apply to transfer advice from 1 October 2020.
We hope that the articles have provided a helpful overview of the new rules but there is, of course, no substitute for reading the full policy statement, final rules and accompanying guidance.
It is certain that firms intending to provide transfer advice from 1 October will have to make significant changes to their advice processes and documentation.
The format and content of suitability reports will also have to change. Existing ATEB Suitability users can rest assured that the report software will be updated and ready for 1 October. Other firms will need to update their transfer report templates. Either way, ATEB has significant experience in helping firms implement robust transfer advice processes. Contact us if you would like to discuss how we can help.
In the meantime, we are working to create some guidance on how firms can address the need to consider a workplace pension and how best to ensure client understanding. Your ATEB Consultant will liaise with you on these and other aspects.
Action Required By You
- Familiarise with the new rule requirements;
- ATEB consulting will be providing relevant structured CPD - if you are interested please contact us with subject reference “PTS CPD”
- If you are interested in learning how ATEB Suitability report software could help you ensure reports are always up to date and compliant, see here. You can sign up for a free trial;
- Talk to your ATEB Consultant about how we can assist with implementing the rules;
- Or contact ATEB directly.