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Wide-ranging pension transfer costs raise regulatory eyebrow in Guernsey

After advisers reported issues with moving their clients’ pots

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The Guernsey Financial Services Commission (GFSC) has published the results of a thematic review into the Bailiwick’s pension transfer landscape, following complaints from scheme members.

In 2020, International Adviser was contacted by financial advisers who were facing issues with transferring their clients’ retirement pots out of the Channel Island.

As a result, the regulator looked into transfers that took place between 1 January 2019 and 30 June 2021, with fees and complaints two key areas.

Overview

Over the period, the number of transfer requests remained consistent:

  • 497 in 2019,
  • 442 in 2020
  • 253 in H1 2021.

The main reason given for requesting a transfer was pension asset consolidation, followed by client relocation, competitive fees, and change of employment.

Just under half (44%) took place between Guernsey-based schemes, while 27% transferred to the UK, 12% to Jersey, with the remainder to Malta, Gibraltar and other unspecified jurisdictions.

But the regulator found that the vast majority (95.1%) of transfers – 1,133 out of 1,192 – were approved and just 4.8% were rejected, with one request pending, as of 30 June 2021.

The top three reasons for transfers not proceeding were: the member withdrew their request, the trustee deemed the advice received by the member to be unsuitable, or the receiving scheme did not meet the criteria to take on the member’s assets.

Fees

On the charges front, the GFSC found that 68% of transfers were charged a fixed fee, 3% were percentage-based, and 1% charged according to time spent.

In the remaining 28% of cases, no fees were incurred either because members had not been charged or because the transfer did not ahead.

Although only a small portion of transfers were charged a percentage-based fee, the watchdog said this was “outside of current market practice”.

“The commission expects pension transfer fees to be charged commensurate to the work undertaken and that those fees should not create a barrier to members transferring out of a scheme.”

In fact, despite the majority following a fixed-fee model, the GFSC found significant discrepancies in the sums charged, ranging from around £200 to over £2,600 ($3,260, €3,043).

While the regulator speculated that fees may differ according to the type of product offered and underlying investments, it did warn firms of the “inherent conflict of interest in charging a fee that would potentially result in a pension member remaining in a scheme that is no longer appropriate for their circumstances to avoid paying an expensive transfer fee”.

Complaints

On a positive note, the regulator discovered that over the two-and-a-half-year period, just 2% of the total pension transfer requests resulted in a complaint which was recorded by the provider.

This means that out of the 1,192 requests, only 22 scheme members were unhappy with the service provided. Of these, four were related to denied transfer requests.

One area that generated complaints was the length of time it took for transfers to be approved or rejected. On average, it took 46 days to greenlight a transfer and around 90 days to turn one down.

Overall, 71% of rejected requests and 23% of approved transfers required more than 60 days to complete.

The regulator said: “Pension Rules and Guidance (2021) states that scheme members must be provided with an explanation regarding the reasons for the delay where the requested transfer is not completed within 60 days following the date on which the licensee received all the information and documentation it reasonably required to do so.

“Legitimate reasons were noted for the 60 days being breached. These included complex transfers due to schemes holding non-standard assets or delays in divestment of assets whilst waiting for the market to correct itself after a period of volatility to minimise losses.

“However, rationales were also provided that cited internal administration delays at the licensee. Where this is the case, the commission would expect the member to have been notified and a solution provided which would not adversely impact the member.”

The GFSC added: “The commission does not make any definitive judgements as to the licensees’ complaints processes and procedures as this was outside of the scope of this thematic review.

“However, the commission does consider that a review of licensees’ complaints handling processes and procedures could be an area for further exploration at a future date.”

Food for thought

Overall, the watchdog concluded that pension transfers are “not necessarily straightforward and Guernsey pension providers, trustees and scheme administrators have an obligation to act with due skill, care and due diligence to fulfil their responsibilities to the pension scheme members”.

It added: “Pension transfers appear to be regular practice within the Bailiwick particularly as pension members favour consolidating their pension assets. There are several potentially significant risks to scheme members that should be considered when a transfer request is received.

“Licensees should consider the context of any transfer request and raise any risks relevant to the transfer with the member, bearing in mind that some of the risks associated with a transfer request from a scheme member in a defined contribution scheme will differ from those faced by a scheme member proposing to transfer out of a defined benefit scheme.

“Where there is a delay to a transfer, the commission would expect the member to have been notified and a solution provided which would not adversely impact the member.

“The commission expects pension providers to take care not to privilege their commercial interests over their fiduciary duties or their legal obligation to adhere to the Bailiwick’s pension regulations.”

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