15 July 2020
Under new rules to be introduced from 1st October, IFAs who recommend a transfer out of a DB pension will need to benchmark the proposed destination for the funds against a low-cost workplace pension. But many of these schemes were designed for automatic enrolment and regular contributions by active members, rather than large transfers in from DB schemes by members approaching retirement. New analysis from consultants LCP based on a survey of Master Trusts shows that, as a result, this new FCA requirement may not provide the consumer protection that is intended.
In the current DB transfer market, most transfers have been to self-invested personal pensions (SIPPs), personal pensions or to retirement products such as drawdown accounts. Relatively few transfers are to Master Trusts or the member’s existing workplace pension scheme.
The FCA has expressed concern that some of the products currently commonly used for transfers come with multiple tiers of charges to meet the initial and ongoing costs of management and advice and may therefore represent poor value. In order to put pressure on advisers to justify these charges and to drive them down, the FCA will now require advisers to benchmark the proposed investment product with transferring into the client’s workplace pension, which may well offer lower costs.
There are two reasons why this benchmarking may not achieve the desired goal:
- The FCA increasingly expects DB transfers to be suitable only for those approaching retirement, some of whom will not be members of a workplace pension scheme; an adviser can therefore explain that this comparator is not relevant to this particular client;
- Even where the transferring member is a member of a Master Trust, LCP’s survey suggests that the relatively limited options currently offered by Master Trusts may mean that it would still not be a suitable destination for a large DB transfer.
LCP surveyed 13 Master Trusts, including the largest providers in the market, and asked a series of questions about their approach to DB transfers.
The largest Master Trust by membership, NEST, said that it did not accept DB transfers at all. Others generally said that they did accept transfers in, provided that the transferring member already had a policy with the Master Trust. Other standard requirements were:
- Evidence that the member had received advice from a qualified adviser;
- In some schemes, there was a further requirement that the advice was in favour of a transfer and that the recommendation was specifically to transfer to the Master Trust;
- Confirmation that issues relating to the member’s DB rights, such as equalisation of GMPs had been resolved, which could be a barrier in DB schemes where that process is far from complete;
However, given that the FCA expects DB transfers to be mainly for those in the run-up to retirement, the replies on post-retirement options give cause for concern about the suitability of benchmarking against transferring into a Master Trust.
The survey found:
- Some schemes reported that they would not necessarily offer lower charges for a large transfer in; by contrast, an individual investor may be able to secure lower charges in an investment product where they are investing a relatively large sum;
- Several schemes talked about plans to ‘upgrade’ retirement offers, or to review their post-retirement options, perhaps in recognition that this had not so far been a priority in the design of Master Trusts (for example, even relatively basic features like offering a monthly income in drawdown were not offered by all);One of the largest Master Trusts said it did not currently have any ‘at retirement’ options other than transferring to another provider or cashing out under ‘small pot’ rules; and
- Very few Master Trusts allowed members to deduct ongoing advice costs (‘adviser charging’) from their pension, which can be a tax-efficient way of paying for advice.
Commenting, Philip Audaer, Principal at LCP said:
“Master Trusts were generally designed to be a mass-market workplace pension solution for companies wishing to comply with Automatic Enrolment legislation, as opposed to receiving large transfers in which reflect the value of years of past service in a Defined Benefit occupational pension.
"The focus of most Master Trusts has been on the accumulation phase, with particular emphasis on the structure of the default fund which covers the vast majority of members. By contrast, someone transferring in a large DB pension may be looking for a wider range of investments and more tailored post-retirement options.
Although the market is developing, relatively few Master Trusts currently offer this. As a result, IFAs may find it relatively easy to meet the FCA’s requirement to benchmark against a Master Trust and make a convincing case in support of their preferred investment option. This benchmarking is therefore unlikely to provide the degree of consumer protection envisaged by the FCA”.