14th November 2012

Prudential: Pension switching in today’s market

Vince Smith-Hughes

Head of Business Development, Prudential

There have been numerous guidance documents given to advisers on pension switching during the past few years. In fact, it may surprise some to know that one of the original pieces of guidance - “To switch or not to switch” - was released almost 10 years ago.

Much of the information covered in this document is still very relevant today. However, the assessing suitability guidance consultation is also extremely relevant, and should be required reading for advisers.

The purpose of the guidance is to help firms improve the standards by which they are providing investment advice to retail customers, which of course includes pension switching business.

So what has changed?

In simple terms many advisers have chosen to change their business model to incorporate a centralised investment proposition. This might include distributor influenced funds, portfolio advice services, discretionary investment management, risk managed funds or a combination of all of these. Though many advisers are still picking individual thematic or geographic funds, anecdotal evidence suggest these advisers are decreasing in number.

Establishing a workable process

What should come first in the pension review process – looking at the costs of switching or analysing what investment choice is right for the customer? That very much depends on the individual circumstances.

Adviser charging

This will come in from next year and will be a fundamental shift in the way many advisers are remunerated. This can be either paid directly from the client to the adviser or facilitated via the provider. The details of this must be agreed with the client upfront. Additionally any charge made against a pension product should relate to pensions advice only.

Beware of the pitfalls

There are a few common pitfalls it is worth being aware of:

• It is commonplace for advisers to use a pension comparison tool to analyse the benefits and costs of moving from one plan to another. However, the user must tailor these systems to be reflective of the analysis being compared, rather than just using default settings on the systems. Two variables to pay special attention to are fund selection and fee/commission.
• Clearly, if the analysis does not reflect the end recommendation, the adviser could fall           foul of not comparing costs appropriately,  which was highlighted in the Financial Services Authority (FSA) guidance. By way of example, on either of the leading two systems it is very easy to select a product near the top of the list and, simply by changing the fund choice increase the reduction in yield by over 1.5% per year. In fairness to these systems, it is generally straightforward to change the fund to that which is being recommended, and thus provide a more accurate analysis.
• When investing in self-invested personal pensions (SIPPs), give as accurate an assessment as possible of the likely costs of moving to the SIPP. This could be relatively straightforward – or not – dependent upon what the SIPP is to invest in.
• If the new product is more expensive than the previous plan, the reasons for the switch must be justified. This could be for any number of reasons, but they must be clear and appropriate.
• Has the client’s capacity for loss been established? This is different from establishing their attitude to risk, and ideally should be assessed separately. This is important as, for example, it could establish whether selecting a guarantee is appropriate.
• Has an internal switch of funds or product been considered, which could have easily and less expensively met the customers requirements?

These are only a few highlights, and it is always worth checking procedures and even individual cases to make sure that advice is in line with the FSA suitability advice template. This can be found here. www.fsa.gov.uk/static/pubs/other/Pension_switching_template.xls

Pensions