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Pensions Bulletin 2020/24

Our viewpoint

FCA bans contingent charging for DB transfer advice

On 5 June the Financial Conduct Authority responded to its July 2019 consultation (see Pension Bulletin 2019/30) by highlighting the large number of people that have received unsuitable transfer advice and setting out a package of measures that it hopes will address this weakness across the DB transfer market.

Contingent charging

The FCA’s policy statement with accompanying rules implements its proposed ban on contingent charging from 1 October 2020 in most circumstances.  Acknowledging that the ban may cause advice to become harder to get and more expensive, exceptions are available for those in serious ill-health and in financial difficulty.  There is a 3-month transition period provided a personal recommendation is given by 1 January 2021 for advice in progress before 1 October.

Under the new rules, advisers must also consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable.  Advisers must also have evidence that the client understands the risks to them of proceeding with the transfer before finalising the recommendation.

The new rules implement, again from 1 October, proposals allowing advisers to provide an abridged advice process.  This short form of advice will allow advisers to either recommend that the member does not transfer or that full advice is recommended.   This abridged advice will not involve consideration of the generosity of the transfer value the member is being offered.  From 15 June, firms cannot use decision trees or a traffic-light system when giving triage services on pensions transfers.

The FCA recognises the conflicts that arise where advisers run their own investment funds and make recommendations relating to transfers to those funds, but it is not proposing any material action against this other than introducing the workplace pension benchmark, some additional disclosures and some new rules that attempt to restrict advisers from cross-subsidising advice charges with product charges.

A guidance consultation has also been issued which aims to help advisers put in place better processes to ensure consumers get suitable advice.  The guidance identifies good and poor practice – intended to help firms identify weaknesses in their existing advice processes.  Consultation closes on 4 September 2020, with an intention to publish finalised guidance in the first quarter of 2021.

Suitability of advice

The FCA has also published an update to its ongoing supervisory work, looking at the advice firms have given to those seeking to transfer out of a DB scheme.  Headlines include:

  • Over 700 of 1,600 advisory firms that the FCA gave detailed feedback to, following an industry-wide data collection from over 3,000 firms, gave up their permission to provide DB pension transfer advice
  • As a result of in-depth reviews being conducted of the 85 most active firms in the DB transfer advice market, the FCA found that there has been an improvement in the suitability of advice given – from a low point of 47% in previous years to 60% in 2018.  However, the FCA remains concerned at the number of files where the advice either appeared to be unsuitable (17%) or where there were material information gaps
  • There are 30 enforcement investigations underway arising from concerns identified in the course of the FCA’s programme of DB transfer work

The FCA has produced an advice checker to help customers decide if they have received poor advice and how to complain if they suspect they have received poor advice – it will be interesting to see in what numbers transferred members complain of being poorly advised.  The FCA has also produced consumer information, aimed at those who are considering transferring but have not yet made the decision to do so.

The FCA’s investigation into advice given to members of the British Steel Pension Scheme has revealed a higher percentage (47%) of unsuitable files than those in the rest of the sample.  As a result, the FCA intends to write directly to all former members of the Scheme for whom contact details are available, who transferred out.  This will help them revisit the advice they received, and to complain if they have concerns.

Comment

These new rules are expected to have a major impact on the adviser market, with less advice likely being available in future, and what is available potentially being seen as unaffordable to members.  This in turn is likely to result in a significant fall in the number of transfers in future, unless a scheme or employer appoints a financial adviser to assist members.

And the ramifications of past unsuitable advice could be felt shortly, with members being encouraged and enabled to complain where they may have been mis-advised.  The extent of this potential scandal could soon be known.

Corporate Insolvency and Governance Bill – concerns about the pension implications mount

The Corporate Insolvency and Governance Bill (see Pensions Bulletin 2020/22) was passed to the House of Lords on 3 June where it had its Second Reading on 9 June.  Unsurprisingly, the Bill went to the Lords with only Government amendments accepted.

During its Commons stages the Labour opposition tabled an amendment that would have elevated pension debts to that of a priority creditor in the event of insolvency.  A separate amendment also sought to give trade unions a voice in any restructuring plans.  Neither was put to a decision and so remain outside the Bill.

Outside Parliament concern is growing that certain aspects of the Bill could be detrimental to DB schemes and the Pension Protection Fund.  In particular, in relation to the company moratorium proposal, there has been legal opinion that the Bill appears to grant super-priority to certain unsecured debts so that they will rank above pension debts where a company enters into administration or insolvent liquidation within 12 weeks of a moratorium ending.

We understand that the Government has been approached by a number of pensions industry groups highlighting concerns that this and other aspects of the Bill will weaken the position of DB trustees and the PPF, whilst strengthening the position of those who lend to companies.  In particular, on a restructuring or insolvency, DB pension schemes may suffer materially worse recoveries leading to more pensioners not receiving their benefits in full and the PPF being subject to a greater financial strain when it takes in the schemes of failed employers.

This concern has been picked up by a number of peers at Second Reading with, for example, Baroness Drake calling for changes to be made to the Bill and welcoming the fact that the Government is alert to the issue and is having discussions with the PPF.

Comment

This Bill is not to be confused with one on the same topic which we have been waiting to emerge since the August 2018 Government response to a consultation that was intended to strengthen the UK’s corporate governance framework following a number of high profile failures (see Pensions Bulletin 2018/34).  This, amongst other things, may have included the need for directors to justify dividend payments where a company’s pension scheme is in significant deficit.

By contrast, the Bill before Parliament is clear evidence that the political pendulum is swinging away from member protection and towards a more employer-friendly dispensation – something that could well be repeated elsewhere as the Government focuses on restarting the economy.

But whether the apparent super-priority issue is intended remains to be seen.  If it is, the law of unintended consequences could apply, with trustees being more wary of offering flexibilities to employers such as deferment of deficit recovery contributions, for fear that they will be doubly disadvantaged if the employer becomes insolvent.  Fortunately, it seems that this and other issues are being teased out by the Lords.

Asset management competition – CMA issues reminder on filing deadlines

The Competition and Markets Authority has posted an update on the process and timing for compliance statements arising from its market investigation into investment consultants that concluded with an Order that came into force on 10 June 2019 (see Pensions Bulletin 2019/23).

As was made clear then, compliance statements by various parties (including trustees of occupational pension schemes) must be made to the CMA - confirming the extent to which relevant requirements have been met – by 8 July 2020 for fiduciary management providers in relation to industry-wide performance information standards, and by 7 January 2021 for all the other requirements, including trustees in relation to compulsory competitive tenders and objective setting for investment consultants.

Comment

It was thought that by now the need for trustees to send compliance statements to the CMA would have been overtaken by DWP regulations that would replace the CMA Order (see Pensions Bulletin 2019/30), but there is no news on when these significantly delayed regulations will be made.

Covid-19 pension-related announcements

Since last week’s Pensions Bulletin, announcements and posts influenced by the Covid-19 health emergency in the world of pensions include the following:

  • On 2 June the Money and Pensions Service published a report setting out its findings on the many-layered adverse impacts of Covid-19 on peoples’ financial wellbeing in the UK.  The report draws on insights and research from over 100 secondary sources
  • On 9 June the Institute and Faculty of Actuaries’ Continuous Mortality Investigation published its ninth weekly report on mortality data.  This report is very similar to that issued last week with only a slight further fall in adverse mortality.  The number of deaths in England and Wales in the week ending 29 May of 9,824 was 1,449 (17%) greater than expected, with 1,822 having Covid-19 mentioned on the death certificate.  The accompanying report suggests that by 8 June there could have been between 63,500 and 66,000 more deaths in the UK since the beginning of 2020 than expected.  The IFoA also references the ONS report published on 5 June, saying that a large number of the excess deaths that took place during the earlier part of the pandemic were likely to have involved undiagnosed Covid-19 in the elderly

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.

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