Executive Summary I have reviewed the alert and commented in detail.

Transcription

1 Heather Dunne Consulting Ltd response to the Financial Conduct Authority alert issued on 24 th January entitled Advising on Pension Transfers Our Expectations Executive Summary I have reviewed the alert and commented in detail. Those comments include Details of our processes and procedures. Thoughts in relation to the confusion around the relevance of Critical Yield. Suggestions for improving Scheme Administrators understanding of the authorisation and permission structure for adviser firms. Reference to my other correspondence relating to the difficulties of obtaining information regarding member benefits from schemes. The majority confirms my current understanding of regulatory requirements Additionally, it clarifies some aspects, which have been a source of confusion in the marketplace: It is appropriate for individuals to specialise. Two advisers can apportion the advice as long as the responsibilities are clear and they liaise throughout the process. The firm is responsible for the Pension Transfer Advice, not the adviser or the Pension Transfer Specialist signing it off. Critical Yield is one factor to consider, not a basis for advice. It is possible to transact business on an insistent client basis though this is not something I would personally do Advice on transfers to overseas schemes requires care this is not an area I work in. Pension Transfer Specialists need to be careful about Investment Scams. Overall Effect Having reviewed the alert at length I am comfortable and confident that our systems and processes are robust and effective. I have decided to adjust our procedure slightly. I will incorporate the results of two additional Transfer Analysis Reports in the full Suitability Report. Those will incorporate the product and investment charges and agreed Adviser Remuneration detailing the impact of those on the Critical yield. This should supplement consumer understanding without creating further documentation and complexity. 1

2 Detailed Comments I have set out some initial background to explain why this alert is so significant to me and my companies. I have then considered each header within the Alert in the order therein. I have added additional headings to break up my response on each of those aspects. Relevance Heather Dunne Consulting Limited (HDC) provides technical and paraplanning support to authorised Financial Advisers. It also contracts out Heather Dunne as Pension Transfer Specialist to various directly authorised firms. One of those firms enables Heather Dunne trading as HDIFA (HDIFA) to be authorised as an Appointed Representative thereof. HDIFA facilitates Pension Transfers for those Authorised Firms who do not have permissions to undertake them. I, Heather Dunne am Managing Director of HDC and the sole proprietor of HDIFA. Alerts regarding Pension Transfers therefore impact directly on both of my businesses. By association this affects my staff together with the advisers which use our technical support under HDC and the authorised firms which are introducers to HDIFA. Background I fully concur that it is essential that consumers are protected from the risk of transferring into unsuitable investments, or even worse, being scammed. I also agree that the transfer of pension benefits is usually irreversible. In practice, I am not aware of any occasions on which members can be bought back into schemes. I therefore totally agree that it is imperative that the consumer understands the implications of the proposed transfer before they choose to proceed. My interpretation of previous guidance has always been that clients must make an informed decision. It is this requirement for an informed decision, which drives HDC s need for scheme data, which, unfortunately, not all Scheme Trustees or Administrators appear to believe they need to provide. That is the subject of separate ongoing correspondence between myself and both the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR). What we Expect The alert states that it is essential that the firm advising on Pension Transfers from either a Defined Benefit Scheme (DB Scheme) or a scheme with Safeguarded Benefits, consider the assets in which the client s funds will be invested as well as the specific receiving scheme. The alert indicates it s a responsibility of the firm advising on the transfer to take into account the characteristics of these assets. This does differ from previous guidance, which I have received from senior members of both the current regulator and its predecessor the Financial Services Authority (FSA). Amongst the individuals I have spoken with in relation to this aspect, are Neil Chipperfield and Robert Stimson. 2

3 That guidance has been sought on several different occasions, since I started HDC in June That has reflected the publication of reviews, guidance and alerts by the personal investment authority (PIA), FSA and FCA i.e. all three regulators relevant during that period. It has also been triggered by the input from various Compliance Firms together with other publications specific to the Financial Services Industry and the general press. That guidance has confirmed my own interpretation of the appropriate regulator s Handbook as amended and adjusted during the period. This has confirmed that it is acceptable for the Pension Transfer Specialist i.e. myself to work in conjunction with another Authorised Firm. That second Authorised Firm will recommend an appropriate portfolio of investments and then monitor those providing ongoing advice to the client. This structure enables my firm to specialise and offer expert support to Authorised Firms. If I were to attempt to maintain the level of knowledge required to be a Pension Transfer Specialist whilst also undertaking the Continuing Professional Development essential to enable me to offer ongoing investment advice, I wouldn t actually have time to offer advice, let alone run a business. I am personally a Chartered Financial Planner twice over and therefore have the appropriate qualifications. It is my level of knowledge which makes me well aware that I have insufficient experience to consider myself an investment adviser. I find that those adviser firms, which have the appropriate permissions and outsource their pension transfer work to us do so on the same basis. In other words, they are sufficiently aware to appreciate that they do not undertake the same number of cases and so cannot maintain the same level of knowledge, experience and expertise. The Regulatory Update issued by the FSA on 13 January 2013 was interpreted by many to mean that the Pension Transfer Specialist must also offer the initial and ongoing investment advice in the receiving plan. I was assured that it was perfectly satisfactory for my firm to work in conjunction with another firm, if that firm were itself an authorised firm. That assurance was obtained at that time, and again once the FSA was replaced by the FCA. It has always been my understanding that it is acceptable, if not sensible, for specialists to work together as long as the consumer is made well aware of which aspects of the advice being undertaken by which adviser. All of the Suitability Reports that we prepare for our authorised advisers make that apportionment of responsibility abundantly clear. I am aware that some providers do not accept this interpretation. On that basis, one particular SIPP provider (Rowanmoor) refuses to accept applications from my authorised firm. However, numerous other providers not only accept applications, but also have jointly presented with me being well aware that this is the way in which I work. Amongst that group, I am pleased to count some much more prestigious firms including Prudential, Old Mutual Wealth, Quilter Cheviot, Retirement Advantage and AXA Wealth. I note that later in the alert, under the heading Permission and Responsibility for the Advice you indicate Where both firms may be responsible for different elements of advice given to the client, firms are expected to liaise for consistency. I presume from this that it is still acceptable for the Pension Transfer Specialist firm to work in conjunction with another authorised firm. It is also possible for that second firm to undertake to provide that 3

4 support and advice to the client, as long as it is made clear to the consumer exactly which firm is dealing with which aspect of the process. I am well aware that the regulator will not specifically state what is or what is not acceptable, but will purely provide guidance. Therefore, I have to assume that my interpretation fits within the parameters of that guidance unless you advise me otherwise. Transfer Analysis Report Under the heading What We Expect, you specifically refer to COBS R (1) [3], which sets out the requirement to prepare a Transfer Analysis. That provides the comparison between the benefits likely (on reasonable assumptions) to be paid under the DB scheme or other scheme with safeguarded benefits and the benefits afforded by a Personal Pension Scheme. That section of the rules and the associated appendices confirm the assumptions required, which are and have always been, set by the regulator (PIA, FSA and now FCA). The alert indicates that the comparison should explain the rates of return that would have to be achieved to replicate the benefits being given up. This is what s generally termed the Critical Yield. It also states the comparison should include likely expected returns of the assets in which the client s funds will be invested. For many years, the regulators have imposed fixed assumptions in relation to the underlying investments. This results in three comparative illustrations at low, medium and high growth rates. Those rates are used within illustrations prepared by the insurance companies, SSAS/SIPP Consultants, investment houses and other providers and are also incorporated in the Transfer Analysis Report. We use the Transfer Analysis Report software system provided by O&M Systems Ltd. We purchase this on a monthly contract and so understand that it meets all the requirements set out in COBS In other words, it incorporates the correct assumptions and is adjusted as and when they are altered. We are also aware that O&M Systems Ltd spent a significant amount of money developing the software and amending it following discussions with the FCA in the summer of The subsequent changes resulted in a more detailed and complex Transfer Analysis Report. That incorporated additional assessments including a reasonably simple straight line Cash Flow Analysis. The new version also introduced illustrations of the alternative benefits available from the Personal Pension allowing for all three standard growth rates on one graph. The previous version considered the low medium and high alternatives in turn. The alert goes on to say that unless the advice takes into account the likely expected return of the assets as well as the associated risks, costs and charges that will be borne by the client, it is unlikely the advice will meet your expectations. I fully concur that that is the case. My main concern is that because you have indicated that in amongst the comments about the Transfer Analysis Report, advisers, Compliance Firms, the press, the Financial Ombudsman Service and FCA staff will take that to mean the charges must be included in all Transfer Analysis Reports. This is an aspect which I have contested over many years, 4

5 because to my mind the costs and charges of the new plan are a separate issue to the actual assessment of the suitability of the Transfer. Our Process I have always considered that the purpose of the Transfer Analysis Report is not to assess the suitability of the new plan, but to evaluate the ceding scheme. The Transfer Analysis Report helps me assess whether or not the Transfer Value being given by the scheme is reasonable. It also allows me to test the benefits being offered in various scenarios i.e. death before or after retirement, normal or early/late retirement and the associated Tax Free Cash and pension available. I look at the Transfer Advice Process in three distinct stages: 1. Suitability. 2. Value of the Transfer Value. 3. New Plan. We cover the first two aspects within the Initial Report we prepare, which looks at the viability of a transfer. Once the adviser has discussed that with the consumer they will complete a more detailed client questionnaire, which will then form the basis of the full recommendation, which includes research and recommendation for the new plan and the associated investments. This means that each and every consumer has several distinct discussions about the transfer option. The first relates to the generic idea and the requirement to actually review the benefits. This meets the need for any holistic financial planner to take into account all potential retirement benefits sources. The second looks at the actual numbers, which are pulled together in the Executive Summary within our Initial Report. The remainder of the report and the Transfer Analysis Report will be provided and can be discussed in more depth. During that second meeting the adviser will discuss the client s needs and objectives in more depth. They will confirm those on a Pension Review Questionnaire. That is a focused fact find, which covers the client based aspects identified in COBS. The third meeting will ideally be where the adviser presents the final Suitability Report, which incorporates the recommendation for the new plan. At that stage, the consumer will complete the appropriate application and discharges forms. On occasions, the discharges and applications will have been completed prior to presentation of the full Suitability Report, in order to meet the three month guarantee deadline. This is because of the difficulties in obtaining the information to enable us to prepare the Initial Report, which is I have said, is the subject of a separate series of correspondence. I understand, that though it is preferable to provide the report before the transfer is processed, it is not essential. My understanding is that it is acceptable for the report to follow as soon as reasonably practical afterwards. 5

6 Our process requires that the Initial Report is presented prior to the member completing the documentation to allow the transfer to proceed. That does mean the consumer has the data regarding the existing scheme and the comparison with the alternative structure, enabling them to make an Informed Choice before deciding to transfer. Having outlined my three stages in the advice process, I m now going to try and explain each in more depth and how they have been adjusted, altered and improved to meet regulatory requirements as and when clarification and guidance has been published. 1. Suitability In simple terms, does a DB scheme (the ceding scheme including safeguarded rights) or a Personal Pension best suit the needs requirements and objectives of the client? This is based on a comparison of the generic versions of each i.e. the overall legislative and structural differences, as against the contractual variations of each type. In the consultation document about Pension Transfers issued in February 2012, the FSA stated Successful Advice Is Suitable Advice. This confirmed that it was possible to recommend a transfer from a DB scheme if it suited the client. There are two sub stages to this test: a. Generic Suitability Does the client meet basic criteria? Attitude to Transfer Risk. Capacity for Loss. Ability to understand. Investment expertise. Socio economic standing. We check if the aims are amongst those listed as appropriate by HM Treasury in their document entitled Freedom and Choice in Pensions issued in July That stated that for some individuals transfers out of their DB Scheme may be in their best interests. The four examples quoted were: If they are heavily in debt. If they have a short life expectancy. If they are unmarried and do not have dependents. If they would prefer wealth to an income stream. b. Specific Suitability Will the Pension Transfer achieve aims, which cannot be met via alternative solutions? 6

7 Can the debt be consolidated or written off? Will the scheme offer augmented ill health benefits or full commutation if relevant? Does the employer provide some form of income protection? In respect of death benefits would life cover be more relevant? For large purchases, holidays etc. would a loan/mortgage be more relevant? Is the Tax Free Cash really required or just a nice to have? Is the intended use of that Tax Free Cash appropriate? Could that requirement be better met from alternative sources, such as savings or investments? This is not an exhaustive list, but sets out some of the considerations we examine. 2. Value of the Transfer Value The Scheme Actuary is generally obliged to calculate the Transfer Value on the Best Estimate Basis. This is required to represent the expected cost to the scheme of providing the members benefits. Other variations do apply in certain circumstances, say if the scheme is funding on some alternative basis such as matching the Pension Protection Fund or is in the process of winding up. The assumptions will differ drastically in those situations, but the principle remains the same. In that calculation process, the Scheme Actuary is guided by parameters for various assumptions set by his professional body, which depends on which particular actuarial group he (or she) belongs to. The Scheme Actuary can adjust the assumptions within those parameters as long as they feel the rate assumed is reasonable. A slight adjustment in expected Retail Prices Index, Consumer Prices Index, capital cost of the benefits, investment return etc. will impact significantly on the resulting figure. The differential will be compounded where the term to Normal Retirement Age is long. These numerical assumptions will also be affected by mortality, morbidity, marital status and sex of partner assumptions he makes about the membership. The same actuary will use different assumptions for these more employee related aspects for diverse schemes. Once the Scheme Actuary proposes a Transfer Value basis, he will then present that to the Scheme Trustees. At that stage, they can require that he adjust those assumptions, because they have overall responsibility for how the scheme is run. The funding position of the scheme is a function of the combined Transfer Values available, because they are the cost of providing the benefits. This also the point at which the Scheme Trustees can ask the Scheme Actuary to adjust Transfer Values to allow for a Scheme Funding Deficit. Furthermore, the Sponsoring Company and the Company Actuary may also have some impact on these discussions. This is because, the company is ultimately responsible for the overall funding position of the scheme and meeting any deficits. 7

8 Once the Transfer Value calculation basis has been set, some actuaries will also impose a monthly adjustment relating to Gilt Yields. We find this is more usually used with the larger schemes. By preparing the Transfer Analysis, ignoring charges for the alternative Personal Pension or the prospective underlying assets, we produce a report which is stripped of all bias. We are therefore then testing the Scheme Actuary s calculation basis against the current regulatory assumptions. This enables me to consider the Critical Yield generated against a standard yardstick. I can then assess whether or not the Critical Yield is out of line with others I have reviewed that day, that week or that month, or even since the FCA (FSA or PIA) last changed the assumptions. This gives me a significantly better feel for whether or not the Transfer Value being offered by the scheme is of a generous nature or being calculated to make the funding position look better than it really is. This system enables my team and me to test whether or not the Transfer Value being offered looks correct or indeed if it is consistent with the benefits being promised. This has allowed me on numerous occasions to argue with the Scheme Actuary that the Transfer Value is insufficient, and obtain a higher figure for the consumer. In some instances, that argument results in the Scheme Administrators realising they ve given us the wrong benefits or quoted incorrect revaluation or the like. Either way, the result is that the consumer is given proper guidance as to whether or not the figure they are being offered is reasonable. I feel this is probably the most important aspect of the informed decision they need to make. This process also means that I can give an indication to an adviser client as to whether or not we would expect the Transfer Value from a particular scheme to be good, bad, or indifferent. For example, I can confirm that Barclays, Aviva and BA offer really good Transfer Values, by the same token LGPS offer very poor Transfer Values. When assessing the Critical Yield on an individual case, I also have to take into account the client specific factors like their age, proximity to retirement, sex, marital status and the age differential between them, their spouse or partner. All of these aspects will have an impact on the Critical Yield. A very short term will significantly increase the Critical Yield; this is simply a factor of mathematics. A large age differential between husband and wife say will also increase the Critical Yield, because a much younger wife is significantly more expensive to purchase an annuity for and the scheme will not be allowing for that in their Best Estimate, because their calculation is based on the generic scheme assumption, not the individual client situation. A single individual will have a lower Critical Yield, because the scheme will be providing a proportion of Transfer Value to meet the cost of promised dependents pension, which they will not require in the alternative annuity. 8

9 This system allows me to make a reasonable judgement based on the results of the Transfer Value Analysis Report. If we were to incorporate the various charges, in every report, it would skew the figures and make it very difficult for me to consider them. This is because the charges applied by the various providers and the underlying investments would add an additional factor which I would be virtually unable to discount. This does not prevent me from preparing supplementary Transfer Analysis Reports incorporating charges for the Suitability Report. 3. New Plan This is the stage at which the adviser firm we are working with will undertake appropriate research as to which provider and investment portfolio is most appropriate for the consumer. This will then feed into the full Suitability Report. We may not always prepare this, for firms which have the appropriate permissions to undertake Pension Transfers, because the adviser firm now has our technical expertise documented within the Initial Report. If we are working in conjunction with an authorised firm which is introducing the case to HDIFA, which will then facilitate the transfer, we will always prepare the Suitability Report. In that situation, the Introducing Adviser will provide us with copies of the research undertaken by them, in relation to the proposed new plan. That will be retained on record to support the recommendation incorporated in the Suitability Report. That report will confirm that the funds will be placed in a bank account, or nearest similar alternative, until that Introducing Adviser takes over the agency on the plan, and puts in place the agreed investment portfolio. That investment portfolio will then be designed and managed by that Introducing Adviser to suit the client s long term needs. As explained previously, in my view the investment advice requires entirely different skills, knowledge and expertise to that involved in the Pension Transfer transaction. The Suitability Report, will incorporate details of the Adviser Remuneration to be charged. If any portion of that is to be paid to the Introducer Adviser that will be disclosed. The consumer will already have agreed to the Adviser Remuneration and any apportionment, prior to completing the application and discharges forms via a specific Client Agreement. That will supplement the standard Terms of Business. The Suitability Report will also confirm the costs and charges deducted by the new plan provider and incorporated within the underlying investments or deducted by the associated investment house where relevant. The ongoing Adviser Remuneration will also be detailed. Where the Introducing Adviser will be taking over the plan, the report confirms that the details of their ongoing advice charges, together with those relevant to the investments they recommend, will be detailed by them at a subsequent meeting when the investment advice recommendation is proposed. It is therefore clear, that is their responsibility to detail all of that information to the consumer. Under other regulatory rules, the consumer must be allowed to opt to meet the cost of providing the Pension Transfer Advice personally, as against via Adviser Remuneration 9

10 being deducted from the Transfer Value. That decision is rightfully made when the consumer is made aware of the intended new plan, together with the associated investment advice and the ongoing charges. It is a separate consideration, which should not impact on the suitability of undertaking a transfer. It is my understanding that the requirement to allow individuals to consider how they wish to meet the cost of advice, was added to improve the situation for clients and enable them to seek advice which was not biased by the necessity to sell a policy. This is why we introduced the Initial Report stage. The fee incurred for that is fixed and charged to our adviser client, who may agree with their consumer client how it is to be met. This reduces any bias with regard to the recommendation to proceed with a transfer. What this means for firms You have stated that the firm advising on the Pension Transfer should not undertake a comparison using generic assumptions for hypothetical receiving schemes. You say the firm must take into account the likely expected returns of the assets in which the client s funds will be invested, as well as the specific receiving scheme. As stated earlier, my fear is that this will be interpreted to mean the Transfer Analysis Report must include charges i.e. Adviser Remuneration, product charges and investment charges. Our current system means that the Transfer Analysis Report does not include that information, but it is all disclosed within the illustration and the Suitability Report which sets out the recommendation for the plan. This means the cost of each aspect is considered separately and does not skew the results. I have reconsidered how this should be incorporated within my process allowing for the contents of the alert. I have come to the conclusion that it remains relevant to prepare the initial Transfer Analysis Report used for assessing the Transfer Value being offered without charges as explained previously. However, I will now supplement that with further Transfer Analysis Reports taking into account plan and investment costs and the agreed Adviser Remuneration. As part of the full report stage we will, as currently, update the original Transfer Analysis Report. We will also undertake two further Transfer Analysis Reports. One will simply incorporate the product and investment charges and the second will allow for the Adviser Remuneration. We will then include the results of all three in a tabular format within the Suitability Report. That should result in providing the data to the client without adding to the size and complexity of the Suitability Report. This does mean that the adviser firms which don t use our full report writing service may need us to provide a revised Transfer Analysis Report incorporating plan charges, investment costs and Adviser Remuneration for their Suitability Report. It also means that those Introducing Advisers will need to provide us with full details of their intended investment portfolio and the associated charges. We will then need to explain this in the Suitability Report, whilst making it clear that we are not making the investment 10

11 recommendation. I am concerned that this will create a blurring of the lines of responsibility for the advice in the minds of regulatory staff, Compliance Officers, the Financial Ombudsman Service and Professional Indemnity insurers. However, as the alert confirms it is acceptable for two firms to advise on separate aspects, whilst ensuring they liaise, hopefully the distinction will be more readily understood. Section 48 Advice As confirmed in the alert, Section 48 of the Pension Schemes Act 2015 requires the Trustees or Scheme Administrators to check the advice has been taken before allowing a transfer to proceed and that the advice has been provided by an FCA authorised firm. One of the major difficulties we have in this respect, is that the Scheme Administrators struggle to understand the FCA register. This is partly because they do not understand the structure of advice firms and their regulation. As mentioned at the outset of this document, I personally am recorded as Pension Transfer Specialist for various firms. Under the current regulatory regime, that means I am listed as CF30. Prior to 1 st November 2007, I was recorded as CF24, as distinct to CF21, which meant it was clear my expertise was in relation to Pension Transfers and that I was The Pension Transfer Specialist for the firm. As explained in that initial section, one of the firms for which I am Pension Transfer Specialist also supervises my authorised firm, HDIFA, which is an Appointed Representative thereof. This structure combined with the way that it is recorded within the FCA register, regularly confuses Scheme Administrators. The Scheme Administrator will search the register on line for my name and the firms under which I am recorded as CF30. The Appointed Representative firm does not show; despite the fact I am recorded as CF30 under HDIFA. Additionally, the register does not show the name of my firm as HDIFA, because it is a sole trader and therefore the full title is Heather Dunne trading as HDIFA as disclosed earlier. In view of this, the firm name is recorded as Heather Dunne. Either way, neither HDIFA nor Heather Dunne show as firms under which I am CF30 when you look at my Individual Reference Number. I find this confusing, and struggle to explain it to Scheme Administrators, but I have been told by the FCA (Firms Contact Centre) that the current format of the record is correct. The Scheme Administrators therefore conclude that I don t know which firm I work for and that I am undertaking the Pension Transfer Advice under a different firm. They then insist that I change the name on the advice declaration to the incorrect firm or ask my principal to confirm that I am authorised. The first option is clearly not appropriate. The second is extremely inconvenient and it s probably somewhat egotistical of me, but I find it insulting. The significant aspect is that it delays the transfer, which is to the detriment of the consumer. This also contradicts my understanding that it is the authorised firm which has the permission and responsibility for the advice not the Pension Transfer Specialist as an individual. Within the alert you state that your rules permit an individual who is not a Pension Transfer Specialist to advise on Pension Transfers though the firm must ensure the 11

12 advice is checked by a Pension Transfer Specialist (internal or external). This means the Scheme Administrator should not be looking at the individual adviser, but at the firm to assess whether or not it has the appropriate permissions. As identified in my other correspondence regarding the information provided by Scheme Administrators about member benefits, I am well aware that the FCA does not have any jurisdiction over schemes. However, it would be extremely helpful if this aspect could be discussed in the joint committee with The Pensions Regulator, who does of course have the regulatory authority and responsibility for Scheme Trustees. Recommendations based solely on Critical Yield As mentioned earlier, I have conducted numerous seminars and presentations in conjunction with various providers. This has exposed me to the opinions of a significant number of advisers. My day to day work with my adviser clients also involves input from many Compliance Consultants who are offering them a different interpretation to mine. I concur that there does still seem to be a significant number of advisers and Compliance Firms which still place undue emphasis on the Critical Yield. I regularly explain to advisers and Compliance Consultants, that the FSA made it clear in February 2012 that the Critical Yield is only one aspect and it is the overall suitability for the client which is significantly more relevant. I think I ve made it very clear that we and all our adviser clients, were already working on that basis long before then. The main difficulty is that people don t understand the Critical Yield. I am regularly told it s the investment return required to match the benefits. It isn t, it s the growth rate required to purchase an annuity which will provide the same level of pension based on regulatory assumptions. That is quite different. There are various reasons which convince firms that they should still rely on the Critical Yield. I can immediately think of a few, which I will set out in the hope that they will be helpful to the FCA Policy Committee in relation to resolving this issue in the long term. The Critical Yield is a number; advisers feel it has more weight than the soft facts. It s much easier to use a number as a guideline as to whether a transfer works or not. Advisers and their Compliance Consultants don t actually really understand what it means or calculates. The misinterpretation that charges and costs must be incorporated and are the most important factor to consider in any advice scenario, which is common amongst advisers, their Compliance Consultants and the Financial Ombudsman Service. Clients see the number and assume they need to make that level of investment return and when they don t achieve it, they complain. Suitability is much more open to interpretation. Regulatory requirements change and appear to be imposed retrospectively. The most relevant example being in relation to the Pension Review, whereby cases were assessed against significantly different standards to those in place when the advice was given. The expectation is that there 12

13 will be a Pension Review Two and this higher advice standard, which is yet to be set, will apply next time round. The Financial Ombudsman Service assesses suitability based on the Critical Yield. This means that advisers are fearful of recommendations to transfer with higher Critical Yields, because they know they will fail a Financial Ombudsman Service assessment. The Professional Indemnity Insurers base their costings, willingness to pay etc. on the Critical Yield. I think this is a combination of all of the above comments. In short, very few people actually really understand what the Critical Yield measures and it s extremely difficult to be certain what will be deemed to be acceptable advice at some stage in the future. Permission and Responsibility for Advice I fully concur that only firms with the appropriate permissions may advice on Pension Transfers that is totally in line with my own personal interpretation. The firms we work with, which are authorised advisers but do not have the permissions for advice on Pension Transfers, work as introducers to my authorised firm. As such, I am the Pension Transfer Specialist for my authorised firm and they are working as authorised advisers under my supervision. The advice in relation to the transfer is wholly the responsibility of my authorised firm. They are not at any stage suggesting they are advising on the Pension Transfer; they are well aware that they act on my behalf. We make it clear to them that in view of this, it must only be the Approved Person that discusses the recommendation we prepare on our behalf. You reiterate in this section that it is not acceptable for the second firm to which an authorised firm introduces a client to advise on the Pension Transfer without taking into account the assets in which the funds will be invested. This again raises my concern that it will be interpreted that we must incorporate the costs and charges incurred in the underlying assets within the Transfer Analysis Report. This will simply serve to cause further confusion as to the purpose and relevance of the Critical Yield. The final sentence of that paragraph, states that where both firms may be responsible for different elements of advice given to the client, firms are expected to liaise for consistency. That confirms my interpretation of the rules is correct; one firm can undertake the Pension Transfer in conjunction with another authorised firm, which will be providing the investment recommendation and ongoing advice providing the two work together. This is of course the scenario in our current process. I have already commented on the final paragraph in that section, which confirms that the individual adviser working with the client need not have the appropriate expertise as long as their work is checked by the pension transfer specialist. I am pleased that you ve also stated that the firm remains responsible for the advice even where the Pension Transfer Specialist is not employed by the firm. 13

14 My interpretation is that this confirms HDC can continue to supply the appropriate technical support and robust Pension Transfer advice process including paraplanning to adviser firms on a contract basis. For each and every adviser firm, the HDC process confirms the individual consultant s advice has been checked by the Pension Transfer Specialist i.e. myself and it is not necessary for me to be employed by the firm. This is the basis on which I ve worked for the last 14 or so years and so it s really good to have this clearly confirmed in writing. Insistent clients I am well aware that many Pension Transfer Specialists work on the basis of insistent clients, because they struggle to justify transfers from DB Schemes. They therefore recommend against a transfer and then facilitate the transaction anyway. It is my understanding, that this is borne out of the belief that the regulator has said a Pension Transfer cannot be justified because retaining the existing scheme is always the best course of action. It is my understanding that the guidance is actually that the existing scheme or the status quo is always likely to be the most appropriate. This therefore means there is a higher level of justification required to recommend the alternative. It doesn t mean it s not possible to do so, but that the comparisons must show an improvement in the suitability for the client. As a firm we do not undertake transfers on an insistent client basis. We also do not sign off transfers except when they are conducted in accordance with our robust process. We only ever operate on a fully advised basis. It is possible though that some of our adviser firms use our Initial Report to substantiate a recommendation not to transfer, with the intention of undertaking the transaction on an insistent client basis. It is not a system I encourage, though as each adviser firm is responsible for its own compliance, a firm with permissions may choose to do this. Advice on Pension Transfers to Overseas Schemes Prior to the changes in legislation in April 2015, we were used by numerous overseas advisers on a contract basis to provide Transfer Analysis Reports. Those offshore advisers then offered advice to expats in accordance with the local regulatory requirements, which were of course significantly less odorous than those operating in the United Kingdom. We ceased offering this service when the legislation changed. We have subsequently been approached by virtually all of those previous adviser clients and many others, together with providers both in the UK and overseas who wish to advise non UK residents. In practice, we are very concerned about advising non UK residents, who would be outside the jurisdiction of the Financial Conduct Authority. This is not therefore something we involve ourselves with via our authorised firm. We do have some UK based adviser firms that we work with, who do undertake advice in this scenario. We suggest those adviser firms to undertake that advice when the consumers are in the UK. We also recommend to the individual advisers, that they should check with their firm s Compliance Officer and Professional Indemnity Insurers, as to whether this liability is covered before proceeding. We specifically state in our Initial Report that the 14

15 consumer s tax status is extremely relevant and should be discussed with that adviser firm. These are of course firms which have permissions to undertake Pension Transfers and are therefore responsible for the advice. Other Advice on Pension Transfers This segment of the alert refers to the scenario where an individual need not take advice, because their Transfer Value is under the legislated minimum of 30,000. The implication is that the client has decided to take advice anyway. In practice, virtually no reputable provider will actually accept funds relating to a Pension Transfer unless advice has been given. This is partially because providers do not wish to accept responsibility for the potential liability, but also because smaller transfers are much more difficult to justify. The upheld complaints are a significantly higher percentage of smaller transfers than larger ones, which means they are statistically a higher risk. We have prepared Transfer Analysis Reports and Initial Reports for smaller cases which are being advised on by our adviser clients. Our authorised firm will not generally deal with Transfer Values under 100,000. This is partly because of the significant costs of providing this advice, which would be disproportionately high and also because smaller Transfer Values are considered a higher risk for potential claims. There are a few odd occasions where the Transfer Values have been reviewed and transacted. This generally relates to very specific circumstances such as ill health or severe ill health. On occasions, some smaller pots have been moved alongside larger funds where the individual transaction is suitable, but combining them reduces the impact of the cost. We have also suggested alternatives such as trivial or stranded pot commutation or drawing the secure income and reinvesting it, if appropriate. In other words, we consider alternatives, which are more appropriate to the client s needs and wishes i.e. client suitability. Personal Recommendations I can confirm that our Suitability Reports are personal recommendations. Those reports do make clear the loss of the Safeguarded Benefits and the consequent transfer of risk to the client including investment risk, longevity risk and the risk the products may not be available or cost effective to meet the client s needs in retirement. Advice on Pension Switches Prior to the change in regulatory guidance in June 2015, I did undertake some pension switching support work, where the funds were to be moved alongside occupational scheme monies. In considering this, it is important to remember that then it was still essential to have a Pension Transfer Specialist to move funds out of DC only schemes, such as Executive Pension Plans, Small Self Administered Schemes and Section 32. Now that all authorised firms can relatively easily obtain Part Permissions, I am not generally called upon to undertake this type of work. 15

16 Even if advisers approach me, I do not work in this arena any longer. This has enabled my team to focus on the Safeguarded Benefit Transfers, which have of course become significantly more prevalent in the last couple of years. Pension Scams your firm is at risk My advice processes are robust. My operation is designed to provide support to advisers and as such must be more efficient and robust than the alternatives available in the marketplace to enable us to retain our edge. I would be able to identify if we were becoming involved in an illegal scheme. I would report this if relevant. 16