In amongst the ever-changing regulatory landscape, some core pieces of advice form the bulk of most of a firm’s business. Pension switches and replacement business tend to be some of them. So, what does good look like? Gemma Knight of Compliance & Training Solutions Ltd (CATS) shares her insight as well as some practical tips you can follow.
Each firm will have undertaken their own independent research on the marketplace and have their own views on the best providers for their clients and the underlying investment philosophies which they recommend. Some of these are done at a firm level with centralised Investment philosophies, whereas others are done on a more bespoke case-by-case basis. Across the country, different advisers and firms will have differing views on what they feel the ‘most suitable’ provider is, and there is absolutely nothing wrong with that as long as the research has been done and the firm’s reasoning has been documented.
What this means in practice though is that when a firm takes on a new client who has
invested in a pension previously, the client will most likely have a pension in place that does not match that which the firm would usually recommend or that falls within the firm’s CIP. The firm’s first reaction is most likely to be to recommend the client move across to their Investment Proposition and whilst this may not necessarily be bad advice, there are a few
steps that firms need to ensure that they take before they make this recommendation. The focus on this has been brought even more to the foreground following the FCA’s feedback on their Retirement Income Review (TR24/1).
Consumer Duty
Whilst I know everyone will be thinking we don’t need to mention this yet again, the consumer duty cross-cutting rules play a key role when considering pension switches[JH1] . In many cases when we review pension switch files, we willsee cases where there are minimal objectives recorded, and no set retirement plans, just the key objectives being that the client wants to have ongoing advice and ‘likes’ the firm’s investment proposition. Given the level of knowledge and experience of the average retail client, how much of a driver is the actual underlying investment when looking at their pension funds? Isn’t the driver for their pension actually more of a personal goal in terms of the retirement they want to achieve in the future?
What does this look like in practice?
- Understanding the client and their needs
Remember each client is unique, and this should be the starting point [JH2] when we take the first step in fully assessing the client’s financial situation, personal objectives and needs. That is both in the short term and the longer term.
It is amazing how many files we will review where the clients’ ultimate retirement objectives are not even considered. Whilst we appreciate that a client in their 30s may not fully understand what retirement looks like to them, some discussion still needs to be had regarding the future and what that could look like to them. For those nearer retirement, the importance of knowing what their retirement looks like for them is paramount as this feeds into the objectives of the recommendation being provided: –
- What do the first 6-12 months of retirement look like?
- What are their longer-term plans? e.g. more holidays, moving home, playing golf etc.
- What are their current expenditure requirements and how are these likely to alter in retirement?
- If their current income is circa £100k, will their income be reduced? If so, how will the change to a much-reduced income impact them?
This means that firms should be requesting to see sight of the client’s state benefit forecast for all pension advice. By seeing this you will be able to see what guaranteed income the
The client can expect to receive. This is particularly important for those individuals who are in their late 50s/ 60s since as of April 2024, individuals will only be able to make back payments for NI contributions for 6 years. This means thatfirms should incorporate a review of the individual’s state pension into their advice process and the firm should be able to give directions to a client as to how they can access their state pension forecast.
In addition to the above, assessments are then needed to find out how comfortable your client is in accepting risk andhow does this compare to the risk needed to produce returns required to meet their objectives.
Don’t forget that whilst you do not need to go into any real detail around a comparison of investment performance inthe suitability report, this research should be evidenced on the client file. Furthermore, if it is a key driver for doing a pension switch then this must be included in the suitability report as this is addressing a client objective.
What is the client’s capacity for loss? When discussing retirement provisions, has a cash flow forecast beenundertaken to look at what a client could realistically expect as income in retirement? Does the client have other assets they can use, or sources of guaranteed income elsewhere which means they can take a little more risk with pension funds they are not reliant upon?
Whilst cashflow forecasting is not mandatory, it is getting to a point where it is getting difficult not to do some level of cashflow modelling exercise for the file. This needs to include the
cost of the services and products being provided.
Advice is like a puzzle and if you have one missing piece, it can affect the final picture!
- Evaluation
Whilst we may want to believe our proposition is the best and most suitable for our clients, we should not automatically discount what the client already holds. We need to ensure we undertake a thorough analysis of their current holdings. This includes looking at charge comparisons including management fees, exit fees and any penaltiesfor moving away from the existing schemes. Does the current scheme have any valuable benefits such as
guarantees that will be lost on transfer? Any guaranteed bonus rates etc.
One area that has been commented on by both the FCA and FOS has been around workplace schemes or looking atusing different investment strategies within the existing
schemes rather than a full transfer. This is something that should be considered in all cases and a review of the funds available within existing schemes documented. Simply stating that the current scheme does not meet the client’s riskappetite is not a justification for transfer as the risk level could potentially be adapted within the scheme. That said, if your investment research is robust and you can give clear reasons for why you do not feel the funds available meet your standards, then this is what should be evidenced on file.
All of the above should be reviewed to find all of the benefits and disadvantages of transfer so that this can be clearly communicated to your client. One of the cross-cutting rules is to avoid foreseeable harm, by ensuring that clients are fully aware of the disadvantages of any recommendations and how these link to their personal objectives, you canevidence that you are meeting this requirement.
Evidence is your friend!
- Recommendation
If after assessing the client’s circumstances and reviewing their existing provision, there is clear justification for transferring the client’s pension to your investment proposition, then your process needs to ensure that this is delivered to the client in a clear and easy-to-understand manner. Best practice would be to summarise the recommendation in a suitability report which is issued ahead of a client meeting. This should be written in plain English and fully cover the reasons for the recommendation and provide the key information that a client should be aware of before proceeding.
Key information expected would be as a minimum – How it meets the client’s ‘specific’ objectives, cost comparisons including the impact of the adviser charges, why the recommended scheme is more suitable that the ceding scheme,and any disadvantages of the transfer.
If the client is transferring multiple pensions, the cost comparisons need to be done on an individual scheme basis toallow the client to be informed about the pros and cons of each transfer rather than just in bulk.
This enables the client to read through the documentation in their own time and then discuss it fully asking any questions they may have before proceeding or declining the advice.
Don’t forget that the illustration should be generated to the age the client intends to retire – not a default age of 75!
- Evidence of client understanding
Whether dealing with a pension switch or any other piece of regulated advice, there is a bias of knowledge between theadviser and client and whilst we will never get a balance here, the client needs to be able to understand the key points of the recommendation given and be aware of all the risks pertaining to the advice given. Evidence of client understanding can be done in many different ways and things we will look for on files will be documents such as comprehensive meeting notes using the client’s own words and Suitability reports written in plain English in a clear format again using the client’s own words.
Summary
So, to summarise, none of the above should be new news. Pension switches fall under the same requirements as all other regulated business. The key is to ensure that any recommendation you provide to a client meets their ‘specific’needs and objectives so that you can ensure that you have your clients’ best interests at heart and can avoid any foreseeable harm to them by putting them in a fully informed position.
About Gemma Knight
Gemma has worked in the Financial Services profession for over 20 years. She began her career at NatWest Bank as customer service advisor until being promoted to Branch Manager with a team of over 20 at the age of 24. Gemma has been with CATS since 2013 and is now one of the Managers assisting Mel and Martyn Holman in the development of the business and the team at CATS.
Gemma has attained the Diploma qualification and is working towards Chartered.
