Your IndustryJul 2 2020

Keith Richards: will abridged advice work?

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Keith Richards: will abridged advice work?

From the age of 55, people could access their savings to do what they want, when they want and without restriction, stated the chancellor. Mr Osborne made it clear to the world that no one would ever have to buy an annuity again.

While the government deliberated whether to include defined benefit pensions within the freedom reforms, there was a general election looming and any exclusion may have angered millions of DB scheme voters.

As a signal that flexibility of DB pensions was more complex, regulated advice for all safeguarded benefit pensions over £30,000 was introduced as part of the Pensions Act.

Key Points

  • Pension freedoms created the context for DB transfers.
  • Abridged advice is one option advisers can consider
  • Some companies may take up abridged advice

At the very same time, some DB pension schemes were offering their members attractive transfer rates, with some multiples reported to be in excess of 47 times the annual pension.

These schemes were trying to stabilise long-term pension liabilities by incentivising scheme members to transfer out. The approach carried a cost in the short term but made it easier for these schemes to plan financially in the long term.

Since this time, we have seen significant interest and demand to access DB pensions and despite the requirement for regulated advice, a new era of the insistent client has emerged, often simply wanting advisers to rubber stamp their decision to access the cash.

Although many advice companies use triage, which the Financial Conduct Authority supports employing, it also had concerns, saying: “When reviewing firms’ triage services, we have found that some forms of triage may be inadvertently crossing the advice boundary.

“For example, if an adviser… tells a client that it is unlikely that a transfer would be recommended if the client took regulated advice, this may be an implicit recommendation to stay in the ceding scheme.”

DB transfers have not been out of the news for the past five years and the issues surrounding the British Steel debacle have created significant focus and political pressure, forcing the regulator to take decisive action. 

The latest FCA amendment to its rules for DB pensions has introduced the concept of “abridged advice”, which is an attempt to allow an element of individual advice into the triage service, without making it as costly as an in-depth financial review.

What is abridged advice?

The abridged advice service, which will be effective from October 2020, enables an adviser to:

• Provide the consumer with a personal recommendation not to transfer or convert their pension; or

• Tell the consumer that it is unclear whether they would benefit from a pension transfer or conversion based on the information collected through the abridged advice process. The adviser must then check if the consumer wants to continue to full advice and make sure they understand the associated costs.

The abridged advice process should only contain the initial stages of the full advice process:

  • Full fact-find;
  • Risk assessment; and
  • Consideration of the benefit structure from the client’s existing scheme.

It must be carried out or checked by a pension transfer specialist, involve a suitability report for advice not to transfer and cannot involve assistance to transfer or convert unless the client has taken full advice.

Companies will need to offset the abridged advice charge from any full advice charge unless the client uses different advisers for abridged advice and full advice.

They should also be aware that as abridged advice does not permit companies to consider a proposed receiving scheme it may well be subject to VAT, although the FCA’s policy statement on abridged advice does not provide any guidance, saying: “The VAT treatment of abridged advice is a matter for HM Revenue & Customs.”

Businesses can provide abridged advice free of charge but must not do so in an attempt to game the ban on contingent charging.

The FCA has made clear that companies must have a clearly defined policy in respect of dealing with clients who qualify for abridged advice, and this should include a description of how, and the circumstances in which, a company might move from abridged to full advice.

Will abridged advice work?

It is clear that the FCA is attempting to resolve significant issues with its proposals: the problems around giving personal advice during the non-advised triage process, the cost of full advice and the understanding, right from the start, that the majority of DB pension scheme members will not benefit from a transfer.

Will abridged advice be a happy medium, or does it fall into the category of ‘neither fish nor fowl’? Only time will tell, but opinion in the sector is divided on the matter.

The process around abridged advice is likely to be a little unsettling to clients. In many cases, they will be making a commitment to pay a fee for a service, but the only outcomes will be that they are told not to transfer (which may well be unwelcome news) or they are told they have to go on to a second stage of the process, or indeed a different advice business that will incur more expense.

At the end of the process they may be told they should not transfer after all.

For advice businesses, using the abridged service may save them time and allow them to offer a valuable service to clients at a reasonable cost.

But they also need to manage risks. If, at some point in the future, it transpires that a client would have been well-advised to undertake a transfer (for example because of health issues that were not clear at the time), the adviser will need to have gathered enough evidence about their decision-making process to demonstrate that they were giving the client suitable advice, considering the information that was available at the time.

They will have to present their evidence to regulators and arbitrators who have the benefit of hindsight, and will have to rely on them imagining themselves back to a time when abridged advice was being introduced.

It is likely that some companies will take up an abridged advice service. However, the best way to tackle the risk of DB pension scheme members making poor decisions is to make sure they are properly educated about the value of the guarantees that they enjoy right from the outset: by the government, the regulator, their employer and the pension scheme.

Services like abridged advice can only make sense to scheme members when they start from a position where they appreciate what they are giving up when they transfer out.

The lack of available professional indemnity insurance to cover DB transfer advice has already had a profound impact on the number of companies now operating in this area, and time will tell how insurers feel about cover for abridged advice.

Keith Richards is chief executive of the Personal Finance Society