Transfers into GPPs may have created significant legacy risk for specialist advisers says Ian Stott, client services director at the Consulting Consortium
The FSA has for many years been nervous of the potential for advised churning in the personal pensions market. Clearly, this is unlikely to be in the best interests of the unsuspecting consumer, especially where advisors are recommending to their clients that they switch from lower to higher charging funds which could lead to poorer consumer outcomes and possibly consumer detriment. The challenge for many consumers is that they do not understand the significant impact that costs and charges have on the size of their pension pots.
As evidence of the regulators concern, the FSA undertook desk-based investigations on pensions switching in 2008 and 2010 and criticised advisory firms for encouraging unsuitable switching. It is far from clear whether or not the situation has improved. The past is often a good indicator of future events, but what is not clearly understood in the UK pensions market is the extent to which legacy issues exist where advisers have transferred or consolidated their clients’ disparate pension assets into a single personal pension contract or perhaps a group personal pension.
One of the big problems associated with pension transfers of this type is people being switched into more expensive pension schemes without the extra costs being justified. A typical example would be someone who has been saving into a Personal Pension, which has modern charges and has been invested in cautious managed funds, being encouraged to switch to a similarly charged group personal pension and still investing in the same sorts of funds.
A not un-common scenario of recent years has been for an advisory firm to re-broke an existing, heavily charged legacy GPP into a new GPP carrying lower charges and wider investment opportunities -nothing wrong with that and certainly in the members best interests. Quite often, what distinguishes a GPP from an individual PPP is that the charges levied by the provider under the GPP may be lower than under the equivalent PPP. The provider, because they are dealing with bulk business, may be able to offer a reduction in their normal charges and advisory firms will often pass on these savings. However, as part of the process of enabling individual members to understand their investment options and the concept of risk, some advisory firms will have encouraged members to transfer existing legacy, and typically small personal pension pots, into the new GPPs without a detailed analysis of the relative advantages and disadvantages of doing so.
To what extent is there an issue in this area, and is this problem ongoing? This remains to be seen, and it is certainly a legacy issue which in some cases will not be truly revealed, especially where multiple transfers have taken place.
Certainly, the larger corporate benefit firms have extremely robust systems and controls in place to ensure the process of pension consolidation is well governed and adheres tightly to FSA guidance and policy. But will some of the non-specialist middle-tier IFA firms be carrying legacy risk in their books? It seems very likely based on the continuing evidence of failure that the regulator reveals in its thematic work. It is however hard to imagine that any regulated advisory firm will still be engaged in poor practice around pension transfers, especially with all the guidance, enforcement action and fines for those firms found guilty of failure. Further, Nest and auto-enrolment introduces even more checks and balances and will force companies and their advisers with existing GPP arrangements to monitor and ensure their members get a fair deal.
In its policy statement PS11/8 Pension reform – Conduct of business changes, the FSA made it clear that firms offering products in the GPP or corporate pensions market have a duty to act in their client’s best interests (COBS2.1.1 R). In the case of a GPP, the contract that exists between the consumer and the provider must mean that this rule applies.
The regulator considers that pensions are long-term products and workplace pensions are likely to have an even longer lifespan as the employer can often exist for much longer than one generation of workers. As such it expects firms to periodically review their customer proposition to ensure the charging structures and default options remain current and appropriate for the customers they serve. And most importantly, the guidance the regulator sets out applies to any workplace pension scheme whether it is used for automatic enrolment or not.