If you have been keeping an eye on my blogs, you will remember that I previously looked at an AF7 past paper from a PS20/6 perspective. As part 1 only covered the short answer questions at the start of the October 2019 paper, I promised a part 2 to sweep up the case study questions. In this follow up therefore, I will be considering how the upcoming changes in regulatory rules and guidance would affect the model answers and provide some commentary on changes that may crop up in future papers.

I won’t bombard you with the content of the October 2019 paper, it can be found in the link below:

Click here for the CII AF7 October 2019 Exam Guide

Case Study 1

If we look at the model answers for this case study, there is little that would directly be affected by the changes in rules and guidance set out in PS20/6. However, looking at the content of the case study, we could consider what may have been asked if this were in a future paper. Here’s a starter for 10:

Eve’s GPP is able to accept a transfer in and she is currently invested in the default fund with capped charges. Outline the reasons why this WPS may be considered more suitable than an alternative destination investment? (10)

Previously, advisers were merely required to demonstrate that any alternative pension plan the client is transferred to is at least as suitable as the workplace pension. From 1st October 2020, advisers will be required to demonstrate that any alternative is more suitable than an available workplace pension to avoid ‘lip service’ being paid to such plans. 

The FCA believes that the default fund in a WPS should be appropriate for all members without the need for ongoing advice. Given the high-charging products that many consumers are currently transferred into, the changes also aim to reduce the product charges for consumers who transfer in future. This is because a WPS is typically cheaper than many advised solutions. Further to this, firms will also have to change their processes to include analysis of a transfer into the default arrangement of an available WPS in APTA.

So our reasons why her available WPS may be more suitable could look like this:

The need to demonstrate that Eve’s existing WPS is more suitable than an alternative could help safeguard her from being transferred to a product that is too complex for her needs or one that perpetuates the need for unnecessary ongoing charges that ultimately reduce her income in retirement.

  • Eve is currently accumulating pension benefits, so she is less likely to require ongoing financial advice as her circumstances are unlikely to change year on year.
  • The FCA believes that the default fund in a WPS should be appropriate for all members without the need for ongoing advice.
  • Eve’s existing WPS benefits from a capped charges default fund, thus product charges would not exceed 0.75% per annum, which could be lower than an alternative arrangement.
  • Eve is more than 12 months from decumulating benefits, so has no need to access a product that may also offer flexible access to benefits at this time.
  • Eve would also receive the protections afforded by Independent Governance Committees or trustees of her GPP.
  • Eve has little to no prior knowledge and experience of investments and has no requirement for a wide fund choice or the ability to self-invest.
  • Eve’s GPP is able to accept the transfer in of benefits, which would enable her to consolidate her pension savings in one place

Whilst hypothetical, it’s easy to see how the updated rules and guidance could be applied to existing case studies so I would urge you to read both PS20/6 and the FCA’s latest Guidance Consultation GC20/1 and have a think of what could be asked. 

Case Study 2

In this case study we also see that our client Anupta is an active member of a WPS. Again in this scenario we could see a question arise in relation to utilising her WPS over the personal pension alternative as opposed to pros and cons of just the PP in Q9. A point to note here is that whilst Anupta is within 12 months of decumulating her pension, from 1st October we would need to still consider her WPS in APTA if it had sufficient flexibility to facilitate decumulation; this applies to lot of modern WPS contracts and is something to bear in mind.

An alternative to Q11 could be:

You have advised Anupa to transfer the benefits from her defined benefit pension scheme to a personal pension so that she can access her benefits flexibly. Based on the information in the case study:

  • Outline the assumptions you would need to use when preparing a cashflow model to illustrate the sustainability of her income needs. (8)
  • Explain the information that you will need to include in the ‘one page summary’ at the front of Anupta’s transfer Suitability Report. (12)

Where cashflow models are used as part of APTA, updated guidance stipulates that several assumptions must be adhered to in order that these models are consistent in methodology and not misleading to clients. Applying this to our answer then:

  • The cashflow model must be in real terms in line with the CPI inflation rate in COBS 19 Annex 4c (currently 2% p/a).
  • Firms must use reasonable assumptions for tax bands and limits if income is modelled on a net basis.
  • The models should take into account all relevant tax charges that may apply in both the ceding arrangement and the proposed arrangement e.g. LTA charges or MPAA charges that may arise.
  • The modelling must include ‘stress testing’ scenarios to enable Anupta to assess more than one potential outcome.

PS20/6 confirmed several measures intended to empower customers, one of which related to enhanced disclosure in the suitabili