Chapter 6: Regulation of retirement income advice

Question 1

What are the four outcomes of consumer duty?

Answer 1

1. Communications
2. Product and services
3. Customer service
4. Price and value

Question 2

Identify a range of actions that a financial adviser could take when dealing with Neil and Helen to ensure that they comply with the Consumer Understanding requirement under FCA Consumer Duty rules.

Answer 2

• Initial discussions to identify vulnerabilities.
• Communicate to suit client needs e.g. phone, email, joint meetings.
• Adjust/ adapt processes to meet client needs.
• Provide information on products/services in writing.
• Benefits & drawbacks must be clear.
• All information must be understandable/clear presentation/no jargon.
• Check consumer understanding/ client could be asked to repeat back the information to ensure understanding/ ensure client understands own needs.
• Client must have enough information to make an informed decision/ explain why recommendation is suitable.
• Time must be given for client to consider information/ no pressure put on client at any time.
• Available for further discussion at any time/ timely contact/ reviews at appropriate times.

Question 3

State and explain the two critical yields relevant to drawdown pensions

Answer 3

Critical Yield A: The rate of growth needed to match an immediate annuity

Critical Yield B: The rate of growth needed to provide a specified level of income.

Question 4

Section 9.3 of the Financial Conduct Authority’s Conduct of Business Sourcebook (COBS) outlines the relevant circumstances that should be considered when a firm is making a personal recommendation to a client regarding income withdrawals.

Outline the relevant circumstances that must be considered.

Answer 4

• Investment objectives.
• Requirement for tax free cash/capital.
• State of health.
• Current/future income requirements.
• Existing pension assets/fund values.
• Other assets/overall wealth/income from other sources/relative importance of the plan given the client’s financial circumstances.
• ATR.
• (Explanation of) any discrepancy between attitude towards an income withdrawal and other investments

Question 5

Section 9.4 of the Financial Conduct Authority’s Conduct of Business Sourcebook (COBS) outlines the relevant risk factors that should be included in a suitability report, when a firm is making a personal recommendation to a client regarding income withdrawals.

Outline the relevant risk factors that must be considered.

Answer 5

• The capital value of the fund may be eroded.
• The investment returns may be less than those shown in the illustrations.
• Annuity or scheme pension rates may be at a worse level in the future.
• The levels of income provided may not be sustainable.
• There may be tax implications.

Question 6

What are investment pathways?

Answer 6

Investment solutions designed to meet customer’s specific retirement goals. Aim is to provide clients with access to good value investments which broadly match their personal goals. There are four pathways:

1. No plans to touch money in next 5 years
2. intent to purchase annuity in next 5 years, using some of their fund
3. plan to start taking funds to provide long term income in next 5 years
4. plan to take out all of their money in the next 5 years.

Question 7

What is the PPF designed for?

Answer 7

Pay compensation to eligible members of a DB RPS where there is an employer qualifying insolvency event and there are insufficient assets in the pension scheme to cover benefits to PPF compensation levels.

Covers schemes wound up from 6th April 2005

Question 8

What are the two levels of protection?

Answer 8

100% accrued benefits

90% of accrued benefits

Question 9

What does 100% protection apply to?

Answer 9

1. Pensioner members as at the point the employer became insolvent.
2. Pensioner members who retired early due to ill-health.
3. Individual’s in receipt of dependent pension.

Question 10

What does 90% protection apply to?

Answer 10

1. Pensioner members as at the point the employer became insolvent who retired prior to the scheme NPA
2. Deferred members under scheme NPA
3. Active scheme members

Question 11

What are the PFP revaluation rules?

Answer 11

Service up to 5th April 2009: In line with CPI, subject to 5% cap
service from 6th April 2009 onwards: In line with CPI, subject to 2.5% cap

Question 12

What are the PFP escalation rules?

Answer 12

Service up to 5th April 1997: No increases, level income paid
service from 6th April 1997 onwards: In line with CPI, subject to 2.5% cap

Question 13

Eric is married and has no children. He retired and took benefits from his employer’s defined benefit scheme at the scheme’s normal pension age of 65. He had been a member of the scheme for 28 years and is currently in receipt of a pension of £45,000 per annum.

Eric’s former employer has suffered serious financial difficulties and the pension scheme has now entered the Pension Protection Fund (PPF).

Explain the compensation that Eric will receive as a result of the scheme entering the PPF.

Answer 13

• As Eric retired/reached scheme normal pension age;
• he will receive 100% of his pension.
• Only his post-1997 benefits will escalate in payment/no escalation on pre-1997 benefits.
• Post 1997 benefits will escalate in line with Consumer Prices Index;
• Subject to 2.5% per annum maximum.
• Spouse’s/widow’s/civil partner’s pension will be a maximum of 50%.

Question 14

A defined benefit scheme that has been in place for 40 years, is being wound up this year.

Outline the statutory priority order that applies to the scheme benefits.

Answer 14

• Pensions in payment secured by annuities/externally;
• bought before 6 April 1997.
• Guaranteed Minimum Pension (GMP)/scheme pension up to the corresponding Pension Protection Fund (PPF) liability.
• Additional voluntary contributions (AVCs).
• All other benefits under the scheme.

Question 15

Signe, aged 59, is a member of her employer’s defined benefit scheme and has been provided with details of a cash equivalent transfer value (CETV) of £160,000. She plans to retire in the next six months and would like to transfer the CETV to a personal pension plan (PPP) to start taking an income immediately.

(a) Outline the requirements the trustees of the scheme must fulfil prior to authorising the transfer of Signe’s benefits to a PPP.

(b) State four benefits and four drawbacks of Signe transferring the CETV to a PPP.

Answer 15

(a)
* Check that she has received advice from a suitably qualified financial adviser.
* Carry out due diligence/checks on the receiving scheme;
* to ensure that it is a legitimate arrangement/qualifying recognised overseas scheme (QROPS)/regulated scheme.
* and the receiving scheme is willing to accept the transfer.
* Send a scam smart leaflet/highlight the risk of scams.

(b)
Benefits
* Flexibility/retire early/change income/reduce when state pension starts.
* Can manage her tax situation.
* Does not need a spouse’s/dependent’s pension/more flexible death benefits.
* May be entitled to a higher pension commencement lump sum (PCLS)/has low savings.
* Can benefit from investment growth.

Drawbacks
* Will be losing guaranteed income.
* Will be subject to market risk/funds could run out.
* Will give up an inflation proofed income/she may have less income in future.
* Has a low capacity for loss so it is unlikely to be suitable for her to transfer.
* Charges/more complex/requires regular reviews.

Question 16

The Money and Pensions Service is made up, in part, of Pension Wise and the Money Advice Service.

(a) Outline who the Pension Wise guidance guarantee applies to.
(b) State seven considerations outlined in the Money Advice Service retirement income options tool.

Answer 16

(a)
* Individuals over age 50.
* With defined contribution (DC) benefits.
* Who are considering accessing their pension/take benefits.
* And survivors/beneficiaries of pension holders.
(b)
* Security/flexibility/understand options.
* Income/assets/inheritance
* How much you need.
* Tax.
* Health/longevity/how long money will last.
* Inflation/attitude to risk/investment risk.
* Value of pensions.
* Shopping around/getting advice/avoiding scams.

Question 17

A financial advice firm has recently identified that a number of their clients have been approached by scammers, pressurising them to transfer their workplace pensions. The firm plans to write to all of its clients to highlight the risk of potential scams.

(a) State four common tactics used by scammers that should be included within the firm’s communication to its clients.

(b) Identify four steps scheme administrators should take to protect scheme members.

Answer 17

(a)
* Access to pensions before age 55/minimum pension age.
* Cold calls.
* Transfer of funds to an overseas pension/transfer into specialist investments e.g. diamonds.
* Promise of high returns/returns that sound too good to be true/increased pension benefits/offering PCLS in excess of 25%.
* Pressure to act immediately.
(b)
* Highlight the risk of scams/share pension scam booklet.
* Carry out due diligence/check scheme registered on transfer requests.
* Understand the warning signs of scams/pledge to combat scams.
* Refer member to Pension Wise/The Pensions Advisory Service (TPAS)/Money Helper/a Financial Adviser.
* Refer to Action Fraud/authorities.

Question 18

You are planning an email campaign to your clients to raise awareness of the risk of scams, particularly in relation to their retirement savings.

(a) Outline the most common tactics used by pension scammers to trick members out of their pension savings.

(b) State The Pension Regulator’s four key principles for consumers to follow to protect themselves from pension scams.

Answer 18

(a)
* Cold calling/emailing/text message/website pop up/unsolicited mail.
* Offers of free pension review.
* Offers of unrealistic/guaranteed returns.
* Pressure to act quickly.
* Single investment/asset class proposal/overseas transfers.
* Ability to access benefits before age 55/minimum pension age.

(b)
* Reject unexpected offers.
* Check who you are dealing with/the FCA register/the firm is authorised.
* Do not be rushed/pressured.
* Obtain impartial information/advice

Question 19

The Financial Conduct Authority (FCA) requires that firms identify the main risk factors relevant to each pension decumulation product it offers. In the Conduct of Business Sourcebook (COBS) 19.7 the FCA provides examples of the risk factors that relate to pension decumulation products.

List ten of these example risk factors.

Answer 19

• Client’s state of health;
• loss of guarantees;
• whether the client has a partner or dependants;
• inflation;
• whether the client has shopped around;
• sustainability of income in retirement;
• tax implications;
• charges (if the client intends to invest their savings);
• impact on means-tested benefits;
• debt;
• investment scams.

Question 20

How are annuities protected by the FSCS

Answer 20

• The annuity is protected by the Financial Services Compensation Scheme (FSCS).
• 100% of the current annuity.
• Any additional features will also be maintained.

Question 21

Asha, aged 62, plans to retire in the next 12 months. She is a deferred member of two defined benefit (DB) pension schemes and wishes to transfer these schemes to a personal pension plan (PPP), in order to access them flexibly. Asha has recently obtained a cash equivalent transfer value (CETV) for each DB pension scheme as detailed below:

Scheme A 20,000
Scheme B 250,000

Explain, giving your reasons, the steps that Asha must take before the DB schemes will agree to transfer the funds to a PPP.

Answer 21

Scheme A:
* As CETV is under £30,000;
* she does not need to obtain financial advice.

Scheme B:
* The CETV is over £30,000;
* and she has safeguarded benefits;
* and she wishes to access her benefits flexibly;
* meaning she must obtain financial advice;
* from an appropriately qualified adviser/firm/pension transfer specialist (which is independent from the scheme);
* and provide evidence to the ceding scheme confirming this.
* The appropriate transfer paperwork must be completed to confirm she wishes to transfer/transfers must be requested.