It is not often the FSA is crystal clear in its guidelines but it most definitely is when it comes to pension switching suitability.
The regulator has stated it will not be happy if “clients are migrated to a higher-cost arrangement without clear and measurable service benefits”. This point was made in its pension switching review in 2008 and again in its thematic review of platforms in 2010, raising the question of how suitable a platform is for pension assets.
The FSA produced a platform suitability and disclosure template to help advisers answer this question. Completing any FSA template is optional but for anyone who does not want to risk a fine from the regulator, I strongly recommend studying this particular template.
It covers the issues the FSA expects advisers to consider when moving pension assets and much of it is similar to the pension switching template.
One of the areas it covers is costs, specifically whether moving to a platform incurs any additional costs.
The likelihood is that it probably will. There are several reasons for this.
First, the majority of pension tax wrappers available on a platform are Sipps, which tend to have higher base charges than standard insured pensions, even if all the investment flexibility is not being used.
Second, accessing a tax wrapper through a platform is generally more expensive than accessing the same tax wrapper direct from the provider. After all, there is another provider (the platform) in the mix and it needs to get paid.
Even where the platform and tax wrapper provider are one and the same, the cost of developing and operating the platform needs to be recouped, so the customer will be paying for that somewhere.
Given all the requirements over suitability, ongoing reviews, and meeting RU64, placing pension assets on a platform is not as simple as placing investment business.
At the risk of sounding like a broken record, the FSA made this point again in its recent policy statement on platforms. In it, the regulator cites as good practice the example of an adviser who typically uses a platform for collectives but not for investment bonds or pensions.
Examples such as these are a generalisation of what is a complex fact-find and decision-making process but what would be really useful is to gain an understanding as to why an adviser would choose this model.
I recently heard an adviser say that while he used a platform for investment business, he could not for the life of him understand why anyone would use it for pension business. The main reason for his view was that the costs quite simply do not stack up – not for his clients anyway.
The obvious explanation for this is that there is another party involved. As well as the tax wrapper manufacturer, the fund manager and the adviser, we now also have the platform provider wanting its slice of the cake.
Add to this the time and effort spent managing clients’ assets on a platform, as well as reviewing them once they are in place, and the point of entry simply becomes too expensive for many clients who do not have a significant pension pot.
In practice, for most advisers, the decision whether to recommend on or off-platform for pensions will not be immediately obvious. The issue can only be resolved by analysing the costs of on-platform compared with off-platform – and that is not always possible.
If the switch is between platforms, the adviser can do the analysis by using the Comparator tool from Capita. Equally, if the switch is between insured arrangements, the adviser can use a tool such as O&M or Selectapension to get a comparison.
But the switch becomes pretty difficult if it is from an insured pension to a Sipp on a platform. Last time I looked, there was no tool on the market that could produce a comprehensive comparison between platforms and insured pensions.
This is a gap I am sure will be filled but that does not help anyone writing pension transfer business on a platform right now.
One way round this might be to use illustrations and compare reduction in yields. We know the FSA prefers the use of RIYs or TERs to identify the cost implications of any investment recommendations but Sipp providers currently do not have to disclose RIY figures within their key features.
This is something the regulator’s CP11/3 product disclosure paper proposes changing but we are not there yet. And whether the illustration will include the cost of the platform is anyone’s guess, or indeed the cost of specific assets or funds.
The FSA might be crystal clear in its guidelines but the outcome for clients is anything but.