September’s come and gone; the nights are drawing in and many trustees are gathered around their meeting tables for the first time since the noisy days of a Brexit – dominated summer that left most other stories struggling to be heard.
The Pensions Administration Standards Association’s (PASA) defined benefit (DB) transfer guidance, a serious, aspirational and fairly far-reaching piece of work with some key players on board, is one of those stories that trustees are really only now starting to notice as they come together over their autumn agendas and pumpkin spice lattes to ask ’what does this mean for us?’ What indeed?
The story so far…
Pension transfers is one of those areas where the plot constantly thickens:
2013 – The year many felt as if predators were stalking their pension schemes. Pension liberation was everywhere; it was organised, it was global and it was down to trustees and their administrators to pick up the crushing due diligence burden of protecting members from scammers, even if that meant protecting them from themselves.
2014 – That budget – ‘the biggest pensions shake-up in a century’ – all leading to pension freedoms and the requirement to obtain financial advice on DB to defined contribution (DC) transfers, but accompanied by a super-clear steer from The Pensions Regulator (TPR) that trustees must not second-guess a member’s transfer decision. Very significantly, the nature of the advice did not have to be disclosed to the pension scheme, only the fact of its existence. Also significant, members could proceed with transfers against financial advice. Trustees and administrators should continue to police the scammers, but also butt out.
2015 – The almost impossible task of safeguarding members against pension scammers in the overseas transfer market is made approximately 100 times harder by HMRC’s sudden withdrawal of Qualifying Recognised Overseas Pension Scheme (QROPS) status, for bona fide qualifying overseas schemes. Since UK schemes look to their advisors, the problem – the great big technical, procedural, legal, operational and commercial problem – dropped straight into the pension administration’s lap. Few of us wake up with either a crystal ball or a qualification in the finer points of global pension law. However, collectively, trustees and administrators found themselves on the front line, picking up the costs, the operational burden and the vast majority of the risk. Who wanted to be the administrator deciding how well the re-drafted rules of an obscure Australian pension scheme integrated with UK tax regulations? Who wanted to be the trustee making that call?
2017 – Another spring Budget and the sound of another transfer shoe dropping as the overseas transfer charge, fully effective from day one, left the industry with some major catching up to do. Pension administrators were effectively positioned overnight as defacto tax collectors for an estimated £65m per year. So far, this is not-so-simple, as the 43 densely detailed pages of guidance issued alongside the policy paper proved.
The Government estimated an operational impact on HMRC of around £0.9m in updating their IT systems to cope with the charge. As administration specialists, strategists, IT experts and educators gathered in their respective businesses to decide how to transform those 43 pages into solid working practices, we could only speculate on the operational impact on the industry.
2018 – Where had all the scammers gone? The boiler rooms had gone quiet. Suddenly we weren’t seeing so many of those all too familiar escalating threats and attempts at intimidation, usually delivered in all caps, energetically punctuated, interestingly spelled and arriving at around 90 minute intervals (“DeMANd to speak to YOUr MANAgER!!! OmbUDSMan!!!! ThE PREsS!!!!”). Weeks could go by without anyone threatening our jobs, reputations or businesses. Had the overseas transfer charge driven the overseas scammers into permanent retreat or were they just rapidly googling how to re-register their schemes somewhere within the European Economic Area (EEA) to circumvent the charge? Time will tell but, in the interim, those at the very sharp end of transfer administration enjoy a brief period of relief.
2019 – A Freedom of Information (FOI) request from Royal London to TPR, reveals £60bn of DB transfer activity since the introduction of pension freedoms, with £34bn in 2018/19 alone (close to 250% of the previous year’s figure), and more than twice as many individual transfer cases (210,000 compared to 100,000 in 2017/18). As transfer activity ramps up, administrators have seen very steep increases in the administrative burden, and every transfer request seems to come with multiple requests for additional quotes, follow-up queries and clarifications.
Separately, the Financial Conduct Authority (FCA) announces that despite the standing assumption that it will rarely be in a member’s best interest to transfer from a DB scheme, 69% of members were advised to do so. The FCA’s targeted work in 2018 had previously shown that the transfer advice was suitable in less than 50% of cases. There’s widespread unease that transfer advice may be being driven more by the higher fees advice, to transfer will generate for the advisor rather than by the best interests of the member – pensions is a numbers game, but something isn’t adding up.
PASA DB transfer guidance
These two separate areas of concern on the TPR and FCA sides of the fence set the scene for where we are now and the background to PASA’s DB working group, headed by these two regulatory heavy hitters.
July’s ‘Guide to Good Practice’ focused on less complex transfer cases (so not partial transfers or overseas schemes), aiming to address the balance between member protection and the statutory right to transfer, through three key aims:
• Improve the overall member experience through faster, safer transfers
• Improve efficiency for members
• Improve communications and transparency in the processing of transfers.
Essentially, the guidance set out detailed administrative timescales for DB transfer quotes and settlements and, separately, established a ‘transfer template’ – a comprehensive schedule of scheme and member information/ enclosures to be issued in all transfer cases.
Which brings us back to the trustee table (and the collectively raised eyebrow) as trustees struggle with what feels like the inherent contradiction in the effort to streamline and speed up administrative processes on the way to what the FCA says are poorly made transfer decisions. Trustees are concerned that they are being asked to fast-track cliffedge choices. At the same time, from the actuarial and legal teams, the same trustees are hearing how very complex the transfer process is in the light of GMP equalisation, and every person in the room has their own view on how finely tuned the transfer discharges need to be, to take account of the nuances of their particular scheme. On the face of it, these are not uncomplicated questions or unwarranted concerns.
In reality, and looking at the bigger picture, for providers delivering quality administration the actual process changes arising from PASA’s guidance are unlikely to be significant. Most of the content of the transfer template should already be part of the existing transfer documentation, so bringing it all together in a relatively standardised format is going to strip out a huge amount of the usual follow-up questions that come from IFAs, while also removing any room for misinterpretation.
This last point feels like a huge aspect of what is informing the overall DB transfers project – although PASA is focused on administration, which is basically TPR’s side of the fence. The whole drive for consistency seems designed to both reinforce the FCA’s campaign to improve the quality of financial advice given to members, while also reducing costs. From here it’s just a short walk to the current FCA consultation on banning contingent charging, where advisors receive higher fees if the member is advised to transfer (surely one of the key barriers to truly impartial advice). The FCA’s supervisory work has shown that fees on DB transfers typically vary between £4,800 and £7,250. If the data inputs are standardised, advisor fees, regardless of the advice given, should become more predictable and manageable, with the FCA aiming for a cap of around £3,500.
Heading into winter 2019, we’re at a ‘watch this space’ point in the evolution of pension transfers. From the administrative and trustee point of view, events on the advisor side are likely to be where we see things changing in the transfer market. Potentially, we’ll see both a shake-up and a clamp down as the FCA, in this instance working with the administration industry, systematically working through the biggest risks associated with the DB transfer process and outcomes.
Principal, Pension Administration – Barnett Waddingham