Pension switch without safeguarded benefits

A pension switch is a transaction not within the definition of pension transfer, but involves moving pension benefits from one scheme to another scheme, of the same type. For example, transferring benefits from a personal pension-type scheme where there are no safeguarded benefits 

What is a pension switch?

There is a difference between the Financial Conduct Authority (FCA) requirements for advising on a pensions switch, conversion or transfer and HMRC legislative requirements, which are concerned with the actual process of transferring. 

This article focuses on the FCA requirements for a pension switch. A pension switch is where a transaction is not within the definition of pension transfer, but involves moving pension benefits from one scheme to another scheme of the same type. For example, where a retail client is transferring benefits from a personal pension or stakeholder pension scheme where there are no safeguarded benefits to another personal pension/stakeholder pension scheme.

For an understanding of the HMRC and DWP requirements, read our article on Transferring a pension scheme.

How a pension transfer is different from a pension switch

For the avoidance of doubt, where the ceding scheme is one of the following it is regarded as a pension transfer, and would not fall within the definition of a pension switch:

A pension transfer is the movement of safeguarded benefits to flexible benefits in a different scheme, as well as certain transfers of safeguarded benefits to other safeguarded benefits (such as transfers from safeguarded benefits in occupational schemes to safeguarded benefits in non-occupational schemes).

Or if it falls into the following definition it will be regarded as a pension conversion:

• a transaction resulting from a decision of a retail client to require the trustees or managers of a pension scheme to:

-  convert safeguarded benefits into different benefits that are flexible benefits under that pension scheme; or

-  pay an uncrystallised funds pension lump sum (UFPLS) in respect of any of the safeguarded benefits.

These are not pension switches and if you require details on the above you should refer to the following articles Pension Transfers and Conversions including DB to DC transfer and Transfer to or from a Qualifying Recognised Overseas Pension scheme.

Please also note that the FCA clarified in Finalised guidance FG21/3 Advising on pension transfers that advisers do not need the permission if all they are doing is advising a client on whether to join a DB scheme. Similarly, advisers do not need the permission if you advise an ex-spouse whether to use a pension credit awarded from a pension sharing order to acquire rights in a DB scheme. The Department for Work and Pensions told the FCA that where the ex-spouse has the option of becoming a member of a DB scheme, the pension credit is not regarded as safeguarded benefits (or money purchase or cash balance benefits) or a transfer payment but as a right in itself. If an adviser advises an ex-spouse on using the pension credit to acquire rights in a DB scheme, this falls outside FCA-regulation. But if they are advised on acquiring rights in an FCA-regulated DC scheme, advisers must have the relevant investment advice permission.

A firm also does not need the permission at all for a pension opt-out where there would be no redirection of contributions to an FCA-regulated replacement scheme, e.g. due to annual allowance considerations. But firms may require the permission if the opt-out is followed by a transfer which effectively connects the pieces of advice together. For example, if a firm nudges a consumer to opt-out in order to get transfer advice. Where a client is an active member of a scheme, a firm should not imply that an opt-out is required to give DB transfer advice but can explain that they could advise on an estimated transfer value instead.

FCA requirements on Pension switching

The focus of the FCA’s requirements is to ensure that individuals, switching their pension arrangements, receive the appropriate level of advice provided by advisers who have sufficient knowledge to ensure the client understands the implications of the proposed action.

All parties involved with these transactions have a duty of care to the client to ensure that clients receive the appropriate advice, as these transactions can have a very significant impact on a client's future financial welfare.

The FCA confirm that a Transfer Value Comparator (TVC) is not required for switches between pensions without safeguarded benefits, the adviser is not required to be a Pension Transfer Specialist nor does the firm require specific transfer permissions.

Pensions switching/transfer review

Around A Day there was a large increase in the amount of pensions business, especially in relation to switching to personal pensions or SIPPs. In 2008 the regulator decided to carry out a thematic review as they believed that there was an increased risk of mis-selling. The review’s report – the Quality of Advice on Pensions switching - was published in December 2008.

The regulator found that the unsuitability of advice fell into 4 main areas:

1. unjustified additional costs (79% of unsuitable cases);
   
   
2. unsuitable investments as not taken account of attitude to risk and individual's circumstances (40% of unsuitable cases);
   
   
3. inadequate reviews put in place or the importance of regular reviews was not explained (26% of unsuitable cases); and
   
   
4. unjustified loss of benefits from the transferring scheme (14% of unsuitable cases).

In more detail - advice was considered unsuitable by the regulator if the outcome was the customer switching into one of the following:

• A pension incurring extra product costs without good reason (this outcome involved assessing cases where, for example, the reason for the switch was for investment flexibility, but this was not likely to be used; the reason was fund performance, but there was no evidence the new scheme was likely to be better; or the reason was flexibility of a drawdown option, but there was no evidence that this option was needed).

SIPPs were often recommended even if investment flexibility wasn't wanted or required.

• A pension that was more expensive than a stakeholder pension, but a stakeholder pension would have met the customer's needs.

However, this does not mean that advising a client to take a more expensive pension contract is unsuitable advice, but it means that the extra costs must bring extra benefits.

• A more expensive pension in order to consolidate different pension schemes, but where the extra cost was not explained or justified to the customer.

As above, a more expensive pension could be justified but the adviser would have to be able to give a detailed explanation as to why it would benefit the member.

• A new pension and the customer had lost benefits from their ceding pension without these being explained or justified.

If the existing pension scheme has a Guaranteed Annuity Rate (GAR) attached to it, then transferring away from the scheme means they will lose the GAR. GAR’s are a safeguarded benefit and, although the adviser doesn’t need to be a PTS, the FCA require the firm to have transfer permissions to conduct the transfer. A member would need to fully understand the reason why this would be beneficial to them.

• A pension that did not match the customer's attitude to risk and personal circumstances.

Advisers must take into account not only attitude to risk, but also other factors such as length of time to retirement. Strategies such as lifestyling or inclusion of guarantees to coincide with retirement dates helps tailor a plan to the client's specific circumstances.

• A pension where there was the need for ongoing advice, but this had not been explained, or offered, or put in place.

For example - drawdown arrangements should really be reviewed much more frequently, ideally at least annually, to evaluate fund performance and risk.

Why switch a personal pension plan?

There are various reasons why a pension holder might consider switching their pension, including

• Does the current provision provide access to the flexible options that are available following pensions freedom legislation? This would include options at the point the client wishes to access their pension and options in the event of death (NB switching pension products now for a future retirement need may be deemed unsuitable unless there are other drivers for the switch).
  
  
• How do the costs of servicing the current pension fund (and future contributions) compare with other plans/provider? Would consolidation on a number of pensions provide positive servicing/cost benefits. What are the costs incurred in transferring the plan?
  
  
• Does the current policy provide access to a sufficient range of investments (perhaps including self-investment options) to fulfil the client investment requirements and risk profile? Is a desired investment available within the current plan?