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PPP Transfers - A Few Q&As

Last year we warned firms to be careful about writing PPP transfer business (“Shock and Awe” is Coming on PPP Transfers. It’s Time to Prepare Your Bunker).

FSA have a done a lot more visit work since then and the outcomes for firms have really not been too good. If you’ve not been directly affected by latest round of visits it would be easy to miss just how tough and deep FSA’s suitability tests on the cases have been.

To help you we've put together this brief Q&A.

Let me have any thoughts or comments.

Q. What was the basic scope of FSAs work?

A. The initial work (conducted in 2008) looked at PPP transfers and SIPPs. Most of the work after that has been simple PPP transfer based.

PPP transfers seems to have been broadly defined as a transfer into a PPP/ SIPP. Transfers into Stakeholders seem have been excluded. The review has taken in cases going back to pension A-Day (6 April 2006).

The reviews have made two essential tests. Firstly whether the new plan was better than the old plan and secondly whether the new plan was better than Stakeholder.

Q. What have been FSA’s main issues?

A. In very broad terms they think that pensions have been transferred unnecessarily. They identified 4 unsuitable outcomes – as follows:

1. Customers were switched to more expensive plans without good reason;

2. The customer lost benefits (like guaranteed annuities) without good reason;

3. The advice placed the customer into higher risk funds than their stated attitude to risk;

4. The client was switched into a plan which required ongoing reviews but these weren’t offered, explained or put in place.

None of these are too contentious in themselves. But the depth of the suitability testing has caught a lot firms out.

Q. What kind of PPP transfer cases do FSA consider to be “more expensive without good reason”?

A. Lots. The FSA reviewers have been very, very tough in this area and it is, without doubt, the one that has been most difficult for those who received visits. In the main FSAs approach has been as follows:

1. It is not justifiable to transfer to a more expensive plan (or to reject the stakeholder option) based on the new plan having a wider fund choice unless the client:

  • Actually uses the extra funds from outset;
  • Is demonstrably a more sophisticated or experienced investor.

Cases for “ordinary clients” that have been justified on the basis of access to external funds have often not passed the FSA’s test.

2. Transfers from With Profits can pass the FSA tests but care needs to be taken about how they are justified.

Generally speaking transfers from With Profits to “more expensive” plans have only been accepted where the file shows fairly clearly that the With Profits plan is no longer most suitable for the client.

Stock justifications relating to With Profits being conceptually “broken” haven’t been accepted. So for the file to be safe it needs to show that this client is unsuited to the with profits plan they are in.

References to low reversionary bonus rates definitely don’t work (reversionary bonuses only make up a part of the return on with profits – so the reversionary bonus rate is a fairly meaningless way of measuring with profits performance)

The most compelling cases relate the clients risk profile to the risk of the actual with profits fund that the client is invested in. Evidence from the ceding plans “Principles and Practices of Financial Management” helps in this regard. Even then FSA will want to see a good explanation of why an internal switch of funds wasn’t considered most suitable.

3. PPPs with upfront loaded charging won’t always pass the test even if the reduction in yield over the full term is equal to or lower than stakeholder

There’s quite a lot of personal pensions on the market which make a higher initial charge than Stakeholder but which return the charges hrough bonuses from (say) year 10. The effect is that the reduction in yield over the full term looks attractive.

Our experience is that these cases can pass the FSA test but they only consistently do so where:

  • The full term reduction in yield is lower than stakeholder; and
  • The suitability letter explains that the charges in the early years are higher and why the adviser expects the particular client to hold the plan long enough to benefit from the later bonus payments.

FSAs approach does make sense here – there is no advantage to a customer in choosing a PPP can be the same price as Stakeholder - but only if you hold it forever. Why not just choose stakeholder and keep your options open?

Q. What do FSA mean by “lost benefits or guarantees”?

A. Mainly Guaranteed Annuity Rates (GARs) on old RAC/ s226 plans and very early PPPs (there’s also GARs knocking around on EPPs and S32s though).

As a rule of thumb anything with a GAR will fail the FSAs test unless there is a special, client specific reason to move. Again its difficult to argue with this as many of the GARs are way, way higher than the current market annuity rate.

Q. What kind of cases fail on attitude to risk?

A. More than you might think. FSA have tended to take a FOS style approach to ascertaining risk attitude. So they don’t necessarily accept what it says on the client file unless the documented risk attitude is supported by the clients broader circumstances.

For example, a case may well fail if a client is documented as “adventurous” at the same time as having a history of holding only deposit or lower risk other investments.

Q. What is the “ongoing review” unsuitable outcome all about?

Basically this has been a fairly straightforward rejection by the FSA of cases which justify transfers or extra charges based on the adviser being able to “review” the plan moving forward.

Basically of the adviser is saying “you are paying me an extra x% so that I can look after your plan” then FSA will expect to see evidence that the plan is being looked after. This means the file containing a specific documented explanation of what the client is getting for their extra money and some evidence that you are doing it (or that you have controls to show that you routinely will).

For example, if you say that the client gets “annual reviews” for their extra 0.5% charge can you lay your hands on a diary system to flag when those reviews are due? If not then you’ll probably fail the FSA tests in this area.

Q. It all sounds fairly horrific – is there anything simple I can do?

A. Yes – firstly check all of your cases using the FSA’s pension switching checking template (you can find it at the bottom of the page via this link). Keep a copy of the completed form on file.

Secondly forget the commission model for PPP transfers - it doesn’t work anymore unless you are willing to accept the remuneration at Stakeholder rates.

The cases will do vastly better against the FSA tests if you take the plunge and start them off as RDR style fee style business. Sell into open architecture “adviser fee” PPPs and take your pre-agreed fee remuneration from the plan as a “adviser charge”. This way the client pays for the advice either way – and any extra charges are transparently for that advice and not for the transaction.