FCA-TPR guidance on DB transfers: how does this affect member support?

How will the guidance change member communications?

Helpfully, the new guidance confirms that most ‘business-as-usual’ communications, along with the growing trend of seeking specialist IFA support for members, does not cross any regulatory boundary. So most schemes will not need to make any immediate changes to their normal activities.

One area that does need looking at is member communications, or modelling tools, that provide illustrations of what members can do with a DB transfer value in a DC scheme – specifically, drawdown or annuity purchase illustrations that use assumptions about the future (which will be the case for all drawdown illustrations). If benefit statements, retirement packs or other communications include these types of illustrations, then these will need to be reviewed urgently to ensure that they are not crossing the line into regulated advice. 

We have already seen examples of these reviews being carried out on our clients. Our view at the current time is that any type of illustration of drawdown or annuity purchase that relies on making an assumption about the future is not permitted, although we have seen examples of other interpretations being put forward. This will be one area to watch to see whether an industry consensus emerges on this point.

What about partnering with an IFA?

Regarding schemes partnering with IFA firms to provide members with access to financial advice, the Pensions Ombudsman also weighed in with a factsheet released in March. Taken with the FCA-TPR guidance, it provides reassurance that, properly done, partnering with a suitable IFA firm is not crossing the regulatory boundary. 

However, as the Pensions Ombudsman’s factsheet makes clear, it is also not without risk to trustees and sponsors. The risks can be mitigated by seeking expert advice when appointing an IFA and managing the relationship with them on an ongoing basis.

So, one change we expect to see is more proactive monitoring of IFA partnerships against an appropriate set of criteria, including those set out by the Pensions Ombudsman. This is an area we are well placed to support trustees and sponsors, given our expertise of the IFA market and ongoing due diligence that we carry out on the main IFA firms.

Looking at the bigger picture

So, where does all this leave us when it comes to DB transfers? 

It’s worth considering the bigger picture. In January 2021, the FCA published data on the whole DB transfer advice market up to March 2020. This gave the most complete picture we have of how advice levels on DB transfers has changed since the introduction of the Pension Freedoms in 2015.

^{Source: FCA}

The chart shows a huge spike in the number of members receiving advice from October 2016; an average of nearly 120,000 a year compared to just under 40,000 a year beforehand. 

The numbers then dropped off significantly following the introduction of substantial rule changes for IFA firms in October 2018, with a 40% drop over the period to March 2020. 

Whilst we do not (yet) have FCA data beyond March 2020, our quarterly CETV market activity tracker shows the activity we have seen over the year to 31 March 2021, as below:

• The volumes of transfer quotes requested by members in schemes we administer dropped by 20% to 40% in each of the lockdowns and was down by about 10% overall across the year; and
• The number of large, one-off bulk exercises carried out by pension schemes reduced, with our data showing only two exercises of more than 1,000 lives coming to the market in the year to 31 March 2021, compared to 14 in the twelve months before.

Therefore, we expect overall advice levels to continue to be down on previous years due to the pandemic. Other factors pointing in this direction also include the well-publicised ban on contingent charging from October 2020 and the reduction in the number of firms now prepared to give DB transfer advice due to the hardening regulatory environment and increasing professional indemnity insurance premiums. 

Despite this, our market tracker did show evidence of a significant bounce-back in transfer quote activity in February and March 2021, potentially evidence of pent-up demand for members to consider their options. We therefore expect there to continue to be demand for members to want to access good quality information about their DB options and to take advice on what is best for them to do – even more so as we emerge from the pandemic with many individuals facing difficult financial decisions.

In both of these areas, we believe there is now sufficient clarity from the FCA and TPR about where the boundary is and for employers and trustees to be confident in supporting members to achieve good retirement outcomes.

If you would like to talk about this topic, please get in touch with your usual Barnett Waddingham contact to find out how we can support you. Alternatively, please contact me below.