By Liam Mayne FIA, Partner and Corporate Actuary at Barnett Waddingham
It is a change that the Financial Conduct Authority (FCA) hopes will eliminate up to £1 billion of harm to consumers each year. For some advisor firms, it will make giving DB transfer advice unprofitable. But whilst much has changed, much also has stayed the same. Depressingly, there are currently headlines about large numbers of transfers being taken from Rolls Royce’s DB scheme in the wake of mass redundancies. The FCA and TPR have jointly issued warning shots to the financial advisers involved. Nobody wants another repeat of the British Steel episode.
The question I want to ask...
What does this mean for trustees and sponsors of DB pension schemes?
It’s tough out there
The contingent charging ban will reduce the demand from members to take financial advice. The FCA estimates demand will fall by over 50%. This should mean fewer DB transfers being taken – which is the aim of the FCA’s intervention. For a lot of trustees, that will sound like good news. Without taking financial advice, an individual with a transfer value over £30,000 cannot transfer their DB pension. So the risk of members being scammed, or simply making a poor decision in the current economic environment, is reduced.
However, trustees should also consider the flip side of the coin. Not only will this lead to some frustrated members, from the sponsor’s perspective, many DB endgame journey plans will build in a level of transfer activity that makes the endgame more affordable. So both parties will often have an interest in asking how do members looking to consider all their options before they retire – including taking a transfer value - now access the financial advice necessary to do this?
This question has been asked for a number of years now. It is not a new issue. And one answer with plenty of merit - partner with a trusted financial advisor firm on which you do some level of due diligence – has not changed. This is because the contingent charging ban has not affected this market. In our experience, none of the small number of firms that partner directly with pension schemes charged in a (materially) contingent manner. For them, it is largely business as usual.
But trustees and sponsors should be aware that business as usual does not mean business is easy. There are challenges to all financial adviser firms operating in this market. Sharply rising professional indemnity insurance costs is a big one. Being sufficiently capitalised and able to withstand intense regulatory scrutiny is another. A number of large schemes partnering with financial adviser firms in this way have all spent a lot of effort figuring out how to ensure the firm they pick remains fit for purpose.
Crossing the line
Of potentially more pressing concern to trustees and sponsors is the FCA’s consultation (GC20/01), on revisions to its joint guidance with TPR on where the advice – guidance boundary sits. Trustees and sponsors can give their members and employees guidance but they cannot give them advice. Where is the line?
Well, the FCA appears to be taking a more cautious view of this than it has articulated in the past. In its view, it appears that any communications which use personalised illustrations to talk about what individuals can do with a transfer value outside of the DB scheme (for example, drawdown illustrations), would constitute advice. Potentially even quoting transfer values could be enough to cross the line. An extreme FCA interpretation here could severely limit the ability of trustees and sponsors to give individuals good quality information about their retirement options. Many schemes already do this using a range of communication tools – for example, interactive modellers.
We wait to see where this the FCA lands on this one –the final, revised guidance is due to be published in Q1 2021. We hope that trustees and sponsors will retain the ability to communicate informative, and balanced, information to their members as they approach retirement.
Summing up
The contingent charging ban has made it harder for members to access financial advice on DB transfers. Trustees, especially with a supportive sponsoring employer, remain uniquely well-positioned to help their members make good retirement decisions. But they need to be well-informed about the pressures on all firms operating in this market if they are looking to partner with one. The contingent charging ban has not changed that.
They also need to be mindful of where the advice – guidance boundary is when communicating supportive information to members. Clarity from the FCA on this should arrive in Q1 2021.
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