3 Areas of Defined Benefits To Be Refined 

As the first DB suitability letters start to appear after the 1st October changes, we wondered whether they would be submitted with a confident press of the button or were very much supported by a lot of finger-crossing!

On the first few cases, we have been pleasantly surprised to see how the new requirements have, on the whole, been adopted. For those who have yet to step into the new world, we thought it would be helpful to share what we have seen, and expect to see.

It is most likely that at this point we will see DB cases that have been started before the changes and are submitted within the transition period. With this in mind, the rules state that ‘where a firm can demonstrate that clients have agreed to contingent charges terms before 1 October and started work before 1 October, on this basis the firm may charge contingently, provided a personal recommendation is given before 1 January 2021’. This transition window will therefore affect a number of file reviews in coming months.

  1. File reviews

The rules in PS20/6 state that in the transition period, firms may omit the comparison with a WPS in APTA. Just for clarity, the research and recommendation of a WPS as an alternative option WILL be required along with the requirement for the 1-page summary and client understanding.

WPS is likely to be an area that will cause concern for file reviews as the regulator has stated that if a recommendation is to go to any other pension, then you must clearly demonstrate why it is more suitable than the clients existing workplace scheme.  The key is ensuring you complete detailed research and justification on file to support this, it is important to remember that it is not enough to just consider it in the way Stakeholder is addressed. Our experience so far is that this area still needs a bit more firming up, as it’s an extra level of detail that advisers just aren’t used to incorporating.

The next area we found needed a bit of work was with evidencing the client’s understanding. We found this really needs some additional skills, potentially through soft skill training, to ensure that you can support this, and that it is clearly documented.

The FCA is looking to establish, in the client’s own words:

  • The risk and benefits of staying in the safeguarded scheme.
  • The risk and benefits of transferring to a flexible benefit scheme.
  • The client’s attitude to the certainty of income throughout retirement
  • Whether the client is likely to access funds in a flexible manner in an unplanned way and the impact of that on the suitability of the funds over time.
  • The client’s attitude to any restrictions on their ability to access funds in a safeguarded benefit scheme.
  • The client’s attitude to and experience of managing investments themselves or paying for them to be managed in a flexible benefits scheme.

These aren’t simple topics to discuss with a client, so there’s a certain level of finesse required with the questions asked and the way their answers are documented to ensure their understanding. Our previous guidance suggests that this is done at the start of the process, while also assessing the client’s Attitude to Transfer Risk.

  1. Documents to be updated

By now firms should have reviewed their Terms & Conditions (AKA client disclosure / Initial disclosure document) to clarify the charging structures in line with new contingent charging rules and introduced the Abridged process into the T&C document.

Firms should have reviewed and updated their pension procedures, created new Pension Transfer Suitability Checklists, introduced carve-out process and guidance and created their questions to demonstrate an understanding of the advice. So, just one or two documents to update!

  1. Training

For training and competence, you will be incorporating new areas of the advice process including the client discussions detailed above. In addition, firms should ensure all advisers have been sufficiently trained to allow the Senior Managers of the firm to be confident on how advisers are introducing the new abridged services and how they address clients who fall into carve out situations. We’re finding this is being managed quite well at present, although there is a need for some quality, interesting defined benefits related CPD for advisers to meet their new requirement… watch this space!

So, will you be submitting confidently?

3 Areas of Defined Benefits To Be Refined