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‘Dangerous gap’ created by FCA pension transfer overhaul

The FCA’s radical overhaul of pension transfer qualifications will leave a “dangerous” three-month window following the Budget reforms which could cause consumer detriment, experts warn.

The regulator set out proposed changes to its pension transfer rules in a consultation paper last week which will require advisers to hold the pension transfer specialist qualification in more scenarios. But with the rules not coming into force until June, concerns are growing consumers will be inadequately protected or unable to access advice in the first few months of the pensions freedoms regime.

Consumer protection

Through the Pension Schemes Act, the Government is making advice compulsory for those transferring out of a scheme with safeguarded benefits. This will bring transfers from defined benefit to defined contribution schemes under the FCA’s remit.

In last week’s paper, the FCA proposes advice on all transfers from DB to DC schemes will require the pension transfer specialist qualification.

It says previous rules, which stated the qualification was not necessary where the transfer was for the purpose of crystallising benefits, no longer provide “adequate consumer protection”.

The specialist qualification will also be required for advice on transfers from occupational DC schemes without safeguards to personal or stakeholder pensions.

A requirement is being added to the Pension Schemes Act which will make advice compulsory for transfers of pension benefits with a guaranteed annuity rate.

The consultation is open until 15 April, with the rules due to be implemented in June. But the FCA says it has been clear on its “direction of travel” and firms may wish to take the new rules into account from April.

Dangerous gap

Defaqto wealth management insight consultant Gill Cardy says the timing of the changes is “crazy”.

She says: “The FCA knew the pension reforms were coming but has decided to change the rules with six weeks to go and with the rules coming in three months after the reforms.

“There will be a three-month window which is really dangerous. A lot of damage could be done because there will be people queuing up to get advice from 6 April.

“The FCA can have as much direction of travel as it likes but unless there is a rule preventing it some people are going to fill their boots.”

Independent regulatory consultant Richard Hobbs says: “The Chancellor caught the FCA on the hop with the pension changes and left insufficient time for legislative changes to be made.

“The FCA can’t do everything before 6 April so there is a gap – and advisers who fall into that gap are taking a big risk. Firms without an adviser with the specialist qualification would be prudent to turn business away.”

FCA head of savings, investments and distribution Maggie Craig says the regulator could take action against anyone exploiting the delay in implementing the rules.

She says: “Our consultation is outlining what we plan to do and we would take a very dim view of anyone looking for ways to exploit the period between April and June. 

“Consumers will not be unprotected until June because our suitability and treating customers fairly requirements are in place.”

Craig says the FCA did not bring the rules in without consultation because that is “not a power we use lightly”. She says: “We did it for the retirement risk warnings because that was required to deal with a major change whereas for pension transfers what we are doing is extending existing protections, making them tighter and more specific.”

Underestimated demand

Experts also warn the FCA has seriously underestimated the number of advisers who will need to take the specialist transfer qualification and the sector may be overwhelmed with demand for transfer advice.

The FCA’s cost benefit analysis says there are currently 20,000 transfers taking place each year from DB schemes. It says analysis by the Treasury estimates a further 9,000 customers will want to transfer as a result of the Budget reforms, plus an additional 3,000 to 6,000 who will be tempted to transfer “irrationally”.

The Treasury assumes each of the 35,000 cases will take one day to process and therefore that 175 pension transfer specialists will be needed, assuming each of them works 200 days per year.

The FCA says 75 per cent of cases could be carried out by the 7,000 advisers who already hold the transfer specialist qualification, meaning 45 additional advisers are needed. But experts say the calculations are based on flawed assumptions. They also only take into account the demand for DB to DC transfers and not DC to drawdown transfers, as the FCA says the latter is the result of a change to Treasury legislation so it is not required to include it in the cost benefit analysis.

The majority of pension transfer specialists take the Chartered Insurance Institute’s AF3 qualification. The CII recommends 150 hours of study and holds exams in April and October.

LEBC longevity director Nick Flynn says: “The changes on DC to drawdown transfers will undoubtedly have the biggest impact. To say 45 more specialists will be needed sounds like a typo. From April, most advisers will become pensions advisers because these changes are so important, so several thousand more advisers will need this qualification.”

Delta Financial Management financial planner Jarrod Ellis says: “The assumption that a case will take 7.5 hours is unrealistic. This is a complicated area and the client needs time to make a sensible decision. Each case takes us around 15 to 20 hours.”

Cardy says: “The number of people who have the specialist qualification is absolutely not correlated to the number giving advice. How many of them are paraplanners or not active in the market? The FCA has no way of knowing how much capacity there is in the market and advisers who want to take the qualification cannot do so until October.”

Standard Life head of pensions strategy Jamie Jenkins says interest in DB to DC transfers is likely to exceed the FCA’s estimate.

He says: “There will be a peak of interest pre-April of people who think transfer values look attractive and who have heard about the Budget changes but there will also be a second peak of people who only become aware of the changes after April. The FCA has underestimated demand.”

Craig says the FCA has made a “conservative” estimate as there will be existing capacity in the market.

She says: “We are trying to work out what might happen in the future, which is very difficult for anyone to know at this stage. Can I put my hand on my heart and tell you one year down the line we will see all our estimates were 100 per cent correct? No. But we have to make reasonable estimates and that is what we have done.”                

Rule changes at a glance 

  • All transfers from DB to DC schemes will require the pension transfer specialist qualification. Previously, the qualification was not needed where the transfer was for the purpose of crystallising benefits.
  • Advice will be compulsory for transfers of pension benefits with a guaranteed annuity rate although the pension transfer specialist qualification is not needed. Advice is not compulsory for pots worth less than £30,000 or where the benefits are used to buy an annuity.
  • Transfers from occupational DC schemes without safeguards to personal or stakeholder pensions are included in the definition of a pension transfer and require a pension transfer specialist qualification.

Expert view

Peter Williams

When the RDR introduced a new level four qualification syllabus, many in the profession, including me, felt the pension paper was too weak. Pension “simplification” had proved to be less than simple. The new pension reforms are making pensions even more complicated and it is obvious the old guidance approach of RU55 is no longer sufficient.

So it is quite appropriate for the FCA to tighten up in this area, otherwise we are going to have advisers who, through ignorance, may give inappropriate advice. It does not mean everybody needs to go out and attain the CII’s AF3 advanced pensions paper but they at least need to work with somebody with that qualification.

I know there will be some advisers who, to meet the RDR requirements, were dragged to the examination hall kicking and screaming and who will now complain they are being forced to upskill again. 

But markets change and the pensions arena is getting more complicated so advisers need to be prepared to keep their qualifications up to date for the sake of consumer protection.

Because of the requirement to consult with the market, the FCA is unable to bring in the new requirement from April but as it has made its intention clear about its direction of travel, it is indefensible for any adviser to think: “I have a three-month window to make hay while the sun shines.”

The FCA’s estimate of 45 more advisers needing an advanced qualification sounds very low and that may be the minimum. In practice I would expect hundreds or  thousands of advisers to take AF3. If this is a stimulus for more advisers to take the first step towards becoming chartered, then that is a fantastic additional outcome.

Peter Williams is managing director at Williams Goddard Consulting 


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There are 22 comments at the moment, we would love to hear your opinion too.

  1. People have still not grasped the nature of this pension revolution and the inadequacy of AF3 as a qualification for the new pension freedom. There is nothing in the AF3 syllabus that current holders of the qualification can locate that proves they have adequate knowledge to advise on a DB CETV. For a start the whole idea that this is actually a pension transfer is misguided. It is not a transfer, it is another retirement option in addition to the various levels of tax-free cash and annual pension on offer from the OP scheme. In fact, the very people who hold this qualification, judging by their comments on previous articles on this topic, are the people who do not understand this revolution because they actually think their qualification equips them and no one else to advise on the CERO (cash equivalent retirement option). AF4 is a much more appropriate exam to prepare advisers for advising on the CERO.

  2. Forgive my ignorance, but what exactly are the “safeguards” attaching to a DC scheme? Is it simething akin to the old GMP?


    John Wilson

  3. @Ken – I disagree, the AF3 syllabus from July/August 2015 for sittings in October 2015 will be relevant and test knowledge based on the new rules. I was going to sit AF3 in April but am putting that back now. As to AF4 being MORE relevant, the syllabus is a combination of what is in R02, J10 and J12, all of which I have passed (I haven’t sat AF4 and don’t intend to). For pension work, AF3 will be more relevant for decades to come and again AF3 syllabus is the same as for R04 and J05, just the testing method is different

  4. Hello again, Ken.

    CERO sounds good if it existed. AF4 certainly has great merit for the investment planning post transfer, no arguments there, but the operative word is post. Prior a client still needs advice re the benefit and equally importnatly the downside of effecting a transfer.

  5. Hi John

    The Pensions Regulator defiinition is “Safeguarded benefits’ are benefits that are neither money purchase nor cash balance”. Maybe that rare animal DC with DB underpin?

    Still confused? I am.

  6. Douglas Baillie 13th March 2015 at 12:14 pm

    There are a number of Safeguarded Befits in some Occupational DC plans.

    Typically these were offered by the likes of Standard Life within their ‘Stanplan’ range, many written a while ago on a group basis where there could be a GAR, a Guaranteed Minimum cash fund at NRD, and a Guaranteed minimum bonus rate on certain types of with profit policies.

    Only last week we saw one that cobined all three of these features with a 6% pa Guaranteed bonus rate! There are probably thousands of these ‘out there’. However the problem is that these guarantees are oly valid at normal retirement age, and the penalties for an early transfer out can be massive. Also please remember that many of the members of these DC plans will probably have certified tax free cash requirements.

    The real remaining risk for some investors in some DC plans is the presently unregulated status (by the FCA) of SSASs, where the trustees can send cash all over the place with impunity. SSASs are regulated by the Pension Regulator whose powers are very different from the FCA. I would like to see SSASs and their adminsitrators and trustees being subject to the same FCA regulatory controls.

    In my view it is essential that persons with multiple pension pots take advice from a Pension Transfer Specialist right from the start, irrespective of where their pensions are invested, as there is a very strong liklihood that many will have at least one pension with a Safeguarded benefit.

    As far as the Pension Transfer Specialist comminity of FCA permissions is concerned, I think that the FCA have significantly underestimated the work and time involved in both properly researching and advising on a Pension Transfer. My paraplanners and staff already spend seemingly endless hours mining information from pension administrators and trustees, and life assurance companies just trying to fully understand and recors the facts. And that is before the adviser can even begin to look at it.

    And then, after that is the KYC requirements and the detailed fact finds that must also accompany the research.

    The FCA are suggesting that it takes 7 1/2 hours to prepare a pension transfer advice report.This is a seriously niave underestimate of the reality, and thus also obsficates the true cost of securing high quality professional advice.

  7. @John & Graham,

    This bit confuses me too.

  8. I have always intended to take AF3 this October, I put it off due to high business volumes, tax year end and now find I may have to pay a third party for months. It was only three months ago they stated this would not happen, would not be needed, that their current rules where robust enough, which is why I deferred taking the exam. We all have enough to deal with at this time.

    Not happy, had I known I would have prepared and booked for April, but should have known better. Bunch of bureaucratic idiots, with no thought or concept ( I bet they have not even spoken to the CII) of times required and lack of knowledge of what they actually regulate.

    If we cannot stop it, lets just regulate it until we make it to expensive to do.

  9. Testing a link to an actual case where a cash equivalent is offered by the OP scheme. This table illustrates potential future situations:

  10. Other issues need to be considered in addition to the qualifications. Have the regulator given any thought to the fact that you can only sit the exam every six months. What about applying for Pension Transfer permissions, how long will that take if thousands of firms make an application in such a short time.
    Finally what happens if your PI insurers refuse to give you cover.
    So many questions, so little time, FCA give us a break.

  11. @Dr D – I agree with you there. It would be so much better if AF exams could be sat 3 times a year rather than just twice.April, August and, December would work better for me personally.
    4 times would be better still especially for resits and when you look at the pass rate, resits are part of life with the AF exams. I just failed AF2 last October and if I could I would have resat by now, but simply no time to do in April, which puts everything else back, including AF3 etc.
    The Ro exams being bookable at fairly short notice are much easier to fit round clients and quitter work times than the AFs.

  12. Graham and Nick – you can’t help feeling it is something that will suddenly become crystal clear when the FCA want to fine somebody (or some body) for not complying with the “safeguard” regulation!

  13. All exams should allow candidates to use computers and access the internet. I can’t think of anything more stupid than pretending these things don’t exist and only allowing candidates to have a pen and a prehistoric pocket calculator. What is the point of plunging someone into the 1970s in order to sit an examination? Imagine turning up at someone’s home to offer financial advice armed only with a pen and a pocket calculator! And telling a millionaire that you’ll sort her finances in 20 minutes.

  14. @Ken – I agree with your comment at 12.09 – I hardly write ANYTHING by hand except notes to read myself and yet the AF exams are 3 hours of writing (I made the mistake of trying to do two written exams on the same day… big mistake as I couldn’t move my hand anymore after the first let alone the 2nd).
    There is also a lot to be said for “open book” exams. the information is there and available on the internet, I don’t try and remember facts I look them up what I need to know without looking is the general picture.

  15. @ Ken

    Do you know what, that is nearly exactly what a tax account friend of mine said, I was moaning about the RO3 exam (I failed by a couple of marks the first time)

    He asked for a mock paper to see how he would fair ! (not very well) he said their probably wasn’t an accountant in the land who would risk a mistake by doing these calculations by hand or in a few minutes !!

    I would say 99.9% of my research and analysis is done via a computer, the need to retain knowledge is largely not needed, I would argue WORKING knowledge is ! But that doesn’t keep the pennies rolling in for the CII and others

  16. Ken, Phil and DH.

    The rationale behind asking a candidate to undertake a manual (well calculator aided) calculation and write down the steps is to ensure understanding. Yes in the “real world” such calculations would be done via TVAS tools etc but without the understanding why certain inputs give ceratin outputs you may tread a dangerous road.

  17. @DH – R03 is the only RO exam I had to resit as I didn’t read the manual first time round. I read it and resit the following week and passed by about 2 marks!
    I sat RB1 last year to prove a point that what bank staff were taught in the 1980’s (if they did their banking exams) should mean ALL bank (& Fpack) staff should be required to sit RB1 or equivalent and the F-pack staff should all sit R01 (regulation and ethics).

  18. Interesting reading chaps.
    All very interesting and valid points, I’m sure.

    Dr Williams makes the case for raising the bar and I give that my full, unequivocal support in ensuring we develop the best qualified and best able to give advice in this complex area.

    I’m a great supporter of open-book exams.
    Then we can really test the application of knowledge, not the search skills of advisers. I want open book exams with unlimited time, to really test the application and understanding. But, until then we have 3 hr exams and compliance.

    Being qualified and up-to-date is part of being professional.
    I’m proud to be supporting, mentoring, helping, coaching and teaching those advisers who want to know the difference between a CETV and TVAS (in the AF3 exam), who want to be able to do an IP calc and who want to develop a wider and deeper understanding.

    Is there any other way?

  19. Here’s an exam question. Armed with pen and a basic calculator answer the following: Client age 60 offered 3 retirement options. (1) Pcls £79,766, RPI linked £26,589 pa (50% spouse); (2) Pcls £142,440, RPI linked £21,367 pa (50% spouse); (3) Cash Equivalent Retirement Option £590,511 into a SIPP. Suppose client dies after 10 years from start and spouse survives a further 20 years. Assumptions: Income from cash equivalent matches pension income pa, drawn annually from SIPP as a crystallisation; investment growth rate of 3.0% pa after charges applies to cash equivalent and invested pcls; inflation is 2.0% pa. Question: Which retirement option leaves most for beneficiaries and by how much?

  20. Ken – may I borrow your crystal ball before I answer?

  21. Ken – may I borrow your crystal ball before I answer?

  22. Graham, isn’t that what advice re annuities has always been about? It’s a typical question you might get in an exam. Advisers are supposed to advise about what could happen to a client’s finances in the future. That’s what it’s all about. If you knew that markets were about to crash in late 2015 then you would advise a client to deposit money in a bank within the FSCS limits. Every single time you advise someone to invest money you are making an assumption about the future, a prediction about the future. So why not try to answer the question? How long do you think it would take you to come up with the correct answer?

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