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The Pension Freedoms, as they’re called, were introduced in 2015 and when combined with historically low interest rates and correspondingly high cash equivalent transfer values, this triggered a massive amount of DB pension transfer recommendations.

This also sparked a flurry of scandals and lots of Section 166 Skilled Persons reviews were ordered by the regulator, resulting in some big fines and censures (there are still a lot in the pipeline too). The issues also resulted in a significant number of firms surrendering their DB transfer permissions, with many citing the risks as being too high and PII costs going off the scale, but that hasn’t resulted in a corresponding drop in DC – DC business, despite some of the issues from DB – DC being very similar.

In a short 7-8 year timeframe (and doesn’t time fly?) DB pension transfers came and went and activity in this area is now relatively low, aided by the fact that gilt yields drove CETVs to low levels again. But where did most of the money go? DC pensions, and there’s a lot of money in DC.

How much?

Opinions vary of course, but the DC market is currently estimated at north of £500 billion and assisted by workplace pension contributions it’s expected to grow to circa £800bn by 2030.

That’s a lot of dosh and based upon what we’re seeing, DC – DC is still a hive of activity for advisers. Most of the cases we look at are replacement business - pension switching has been prevalent for much longer than DB activity and it remains the new business mainstay for a high volume of firms (there isn’t a great deal of new investment money out there). So given the issues that DB-DC revealed, is there a bigger underlying issue with DC-DC? Quite possibly, and for a number of reasons.

Legacy Issues

It was late 2008 when the FSA conducted a thematic review into PP switching and the findings at the time didn’t make pleasant reading.

A switching template was introduced to help firms assess suitability, which looked at needs analysis and the drivers behind the reasons for the switch, a list of unsuitable outcomes, a look at whether benefits had been lost, an assessment of whether the receiving fund matched ATR and the small matter of ongoing reviews. Hardly anyone uses this now of course, but based on what we see it would be worth reintroducing it in a lot of firms, because the issues that the thematic review raised are still prevalent now, perhaps more so.

Possibly exacerbating matters has been the prevalence of platform use and Centralised Investment Propositions (CIPs) since RDR. Most firms have become pretty much welded to one or more platforms and many have developed their own CIPs, which cover a diverse range of solutions and they not only actively promote, but also defiantly stand by.

This is all well and good and a platform/CIP combination may well be a decent outcome for many clients, but if you can’t justify the advice to switch in the first place the end game is somewhat immaterial and it’s the start of the process where firms have had, and continue to have, issues.

Suitability, suitability, suitability…

The obligation falling on every firm and adviser is to evidence that the advice they provide is suitable. Every week we discuss cases with firms who defiantly state that their clients are ‘happy’ and that their advice must therefore be suitable, but a happy client doesn’t necessarily mean that they received the right advice.

Many clients are blissfully unaware that what they had before a switch was recommended was perfectly OK, but their adviser extolled the virtues of the new proposition (which is their firm’s preference) and they were advised to move, despite the fact that their existing plans frequently offered a decent fund choice and were competitively costed. So a switch was the way to go, but was a fund switch recommended? No. Why? Because the existing contract didn’t offer access to the firm’s CIP.

Was the client (who wanted to ‘review their pensions to check they were on track’) advised to consolidate into one of their existing plans, or even into their workplace pension? Erm, no.

Had the client provided clearly defined objectives beyond the ‘review’ mentioned above (review usually translates into switch everything into what the adviser wants to recommend) and did the file articulate this in their own words? Nope.

Did the client’s existing contracts offer access to options offering ‘flexibility’ in retirement? Maybe not, but as the client may be years away from taking benefits do they need to switch to access these options now? In many cases, no.

Did the client incur advice costs for the switch recommendation? Usually. And did they sign up for the firm’s ongoing review service at X% per annum? Oh yes. Did they actually need an annual review when the portfolio recommended is: “regularly reviewed by our investment committee to ensure that it remains in line with your investment goals” and is: “automatically rebalanced to ensure that it stays in line with your risk profile”? Quite often, no.

Clients may well benefit from advice in relation to their DC pensions and consolidation could be a suitable outcome, but based on what we’ve seen for years and continue to see now, many files simply do not corroborate this, because there is no imperative to switch (other than moving to the firm’s preferred solution), the KYC is weak and lacks detail, client objectives are poorly defined and frequently generic, the adviser hasn’t adequately discounted use of existing arrangements (and workplace pensions should definitely be a consideration here) or considered internal fund switches, and the client has ended up incurring considerable additional costs for no justifiable reason.

Frequently, files just don’t explain how the switch translates into tangible benefits for the client and as we’ve highlighted on countless previous occasions, a lack of robust KYC means that the firm just cannot evidence that its advice was suitable.

On the other hand

Does the client have a consistent investment strategy across their existing plans? More often than not, they don’t. Would they actually benefit from one? Probably. Is this articulated on files? Rarely. There could be real benefits here but they’re so often overlooked.

There is (understandably) a focus on costs when looking at switches and it is a fundamental requirement to compare the costs of old versus new (that’s all costs, including initial and ongoing) and costs are known, whereas investment performance is not, but what will make the biggest difference to your DC pension fund when you come to take the benefits?

All things being equal you’d choose the cheapest option, but is cheapest always best? Sometimes it’s worth paying more for a better outcome, but this is so poorly articulated on files because so often the KYC is weak and generic and the rationale used is supported with anecdotal rather than actual evidence.

The burden falls on the adviser to be able to provide evidence that the switch is in the client’s best interests, but time and again we see little or no justification for a move and frequently the client could have consolidated (if this was the right thing to do) into one of their existing arrangements, but advisers seem hell bent on a move to the firm’s chosen strategy and when the advice costs are added up, it could be years before the client recoups them (known as self-defeating transactions).

When you look at projected retirement funds the client is often worse off as a result of the switch, so that CIP had better deliver, otherwise your advice has ultimately made the client worse off.

Why not switch adviser charging on in one of the existing plans? Or even charge a fee for the advice? We rarely see it, but it’s an option and one that is hardly ever properly discounted.

We see all of the above week in, week out, and it’s been going on since well before RDR. Some clients have been switched multiple times, more often than not because the firm has decided to implement a new in-house investment strategy, so advisers are sent off to go and switch their existing clients into the new solution.

This is a recurring theme and common across numerous firms, but how many advisers switch their own pensions with this degree of frequency? And move to their firms’ CIPs?

Principle 12 requires all firms to: “act to deliver good outcomes to retail clients”, but so does the sixth Conduct Rule, which all firm owners, advisers, paraplanners and support staff are subject to. If it’s not right, it’s not just the adviser’s problem!

Our view

PP switching seems to continue unabated and given the size of the DC market, this remains a soft target for many firms and advisers, but the Consumer Duty requirement to deliver good client outcomes could well indicate some big problems on the horizon.

There are valid and justifiable reasons to move clients from their existing arrangements to a new one, but without evidence to prove that this is in their best interests firms will struggle to evidence that their advice is suitable.

This activity remains one of the primary sources of new business for many firms and it’s quite feasible that more money moves from DC – DC than ever did from DB – DC, after all, the money from DB is now in DC and at some point advisers will look to make another switch.

We rate more replacement business advice as unsuitable than any other and despite the various thematic reviews and their grim findings, standards are still no better in many respects than they were before RDR, sometimes considerably worse.

If a switch is demonstrably in the client’s best interests then go right ahead and make the recommendation, but if you can’t definitively prove it then you either need more information, or you should advise the client to stay put. Advice to do nothing is still advice after all.

This sector of the market is massive and it’s only a matter of time before regulatory attention really focuses on it. Or maybe claims management companies will get there first, once they’ve finished with ongoing reviews?

Action required by you

If you can’t evidence suitability of advice on PP switches and any of the above strikes a chord then you may need to consider doing something different. That may be an update to your policies and procedures, or an update to your KYC gathering/fact finding process.

Weak KYC remains the root cause of many problems in firms and given the focus on good client outcomes, weaknesses in this area are an easy way of falling short of Consumer Duty expectations.

If you need a refresher on what good KYC looks like we can help. We’ve provided updates for plenty of firms and seen tangible improvements in their file quality as a result.

Consider implementing more file checks pre and post-sale, so you have the MI to evidence that clients are receiving good outcomes.

Don’t forget that Principle 12 and the Conduct Rules apply to virtually everyone in your firm, so if you see a problem it’s up to you to highlight it.

Author - Paul Jay