The suitability of advice to transfer from a defined benefit (DB) pension scheme to a personal pension has faced a great deal of regulatory scrutiny in the past couple of years.
Deciding to transfer a promise of guaranteed income to the uncertainty of an invested capital value is far from simple. This choice represents one of the most complex personal finance decisions we will ever have to make. As a result of this complexity involved, it’s right that the Financial Conduct Authority (FCA) subject financial advisers who offer this advice to a high level of scrutiny.
The consequences for an investor making the wrong choice to transfer are severe and potentially very damaging to wealth in retirement.
The FCA has repeatedly communicated what it expects from financial advisers who advise transferring (or retaining) a defined benefit pension. They have also been taking more enforcement action against the minority of advisers who fail to live up to the high standards expected.
In their latest update, the FCA has concluded that too much DB transfer advice remains below their acceptable standard. It’s the first update since December 2018, where they identified unsuitable advice in more than half of cases reviewed. At the time, the FCA made it clear standards needed to be improved.
By way of comparison, previous work carried out by the FCA concluded that, in the broader financial advice arena, suitability levels were around 90%; still room for improvement, but much better than in respect of DB pension transfers. Within their update, the FCA noted that more than 3,000 financial advice firms hold the relevant permissions to advise on DB pension transfers. Of these firms, all but 27 responded to a request to provide detailed information about their activities.
The majority of the firms with permissions to advise on DB pension transfers were doing so between April 2015 and September 2018; 2,426 firms out of the 3,042 firms holding permissions. Many of these advice firms were carrying out a process known as ‘triage’, to determine whether providing full advice in respect to DB pension rights was worthwhile. This triage process resulted in nearly 60,000 clients not proceeding to the advice stage.
Around a quarter of advice firms who are active in this DB pension transfer market are facilitating transfers on behalf of ‘insistent clients’, who wish to proceed with a course of action contrary to the advice provided.
Between April 2015 and September 2018, the FCA found that 234,951 DB scheme members received professional advice on whether or not to transfer their pension benefits. Of those, 69% received a recommendation to move, and 31% were recommended not to transfer. Of the scheme members advised not to transfer, 13% transferred regardless of the advice, as insistent clients.
The average transfer value was £352,303, with a total of £82.8bn worth of pension benefits advised upon. To put this figure in context, there is £1.57trn in DB pension schemes eligible for the Pension Protection Fund as at March 2018.
Of the 171,581 clients who were recommended to transfer or who transferred as insistent clients, 70% signed up to ongoing advice from the firm advising the transfer.
The FCA expects advisers to start from the position that transferring their DB pension is unlikely to be a suitable course of action. This starting position means the FCA is concerned about the proportion of recommendations to transfer, at 69%, which is arguably far too high. Some individual firms had much higher percentages of transfer recommendations than this, exceeding three-quarters of their proposals in some cases.
The FCA does, however, recognise that some firms with a high percentage of transfer recommendations may have filtered out those investors who were less suitable to transfer, during their initial triage process.
Commenting on this update from the FCA on DB transfer advice, Steve Webb, Director of Policy at Royal London, said:
“It is clear that standards of DB transfer advice still vary far too much. Good advisers are rigorously screening out people who should not transfer and make clear the advantages of staying in a DB scheme.
“But some are relying on unregulated introducers to drum up business and seem to be leaning much too far towards recommending transfers.
“The sooner that action is taken against those who are not doing a proper job, the more confidence consumers can have when they seek transfer advice”.
The FCA will now directly assess the most active firms in the DB transfer market, during the rest of the year. They will be writing to all firms where the data suggests potential consumer harm, setting out expectations and the actions these firms should now take.
Depending on the outcome of these regulatory assessments in 2019, the FCA will then consider extending their assessments to a broader range of firms next year, as well as introducing a series of events designed to raise advice standards and engage with more people.
When seeking advice on such an important issue, it’s vital to work with a highly qualified financial planner who has extensive experience and will act in your best interests.
Do get in touch with Wells Gibson if you have any questions about your pension benefits.