The Financial Conduct Authority (FCA) has published details of its work on final salary (defined benefit) pension transfers, warning that in this area “some firms are not giving enough attention to customer outcomes.”
The regulator acknowledges that “the number of consumers transferring from DB schemes to personal pensions has significantly grown over the past year.”
Over the last two years, the FCA has sought detailed information from 22 firms on their transfer business. It went on to review a sample of client files for 13 firms, and visited 12 firms. This activity led to four firms – a fairly proportion of those assessed – ceasing to advise on this type of business.
In all, since the start of 2016, 32 firms have either withdrawn entirely from this market, or have chosen to limit their final salary transfer activity.
Since October 2015, the FCA has reviewed 88 recommendations to transfer out of final salary schemes. Of these, 47% were suitable, i.e. a minority of the cases. 17% were graded as unsuitable, and in the remaining 36% of cases it was unclear if the recommendation was suitable.
When considering the suitability of the recommended product and fund, the FCA believes that suitability was only demonstrated in 35% of these cases. 24% were unsuitable and 40% were unclear.
Proposals contained in the recent FCA consultation paper on pension transfers include:
- Where the transfer would involve a transfer or conversion of safeguarded benefits, the advice needs to be given in the form of a personal recommendation, and it will not be acceptable for firms merely to provide general guidance. Safeguarded benefits include: defined benefit (final salary) schemes, guaranteed annuity rates, deferred annuity rates, guaranteed basic annuities and guaranteed minimum pensions
- A removal of the formal rule saying that advisers must initially assume that any transfer will be unsuitable for their client. However, the paper still says that “it remains our view that keeping safeguarded benefits will be in the best interests of most consumers.”
- Expanded rules on how firms should assess suitability of advice. The FCA proposes that an assessment of suitability should encompass: the role safeguarded benefits play in providing the level of income a client expects or needs, whether the investments in the receiving scheme meet the client’s risk profile, and the way in which funds will be accessed by the client following any transfer
- A transfer value analysis must include a comparison showing the value of the benefits being given up
Pension transfer business is undoubtedly a high-risk area, and advisory firms that carry out these transactions must ensure they have rigorous procedures to ensure suitability of advice. All transfer advice must for example be checked by a pension transfer specialist who has the skills and experience to determine whether the advice is suitable, and who holds a specialist pension qualification such as G60 or AF3.
The FCA has warned that it will continue to carry out suitability assessments of advisory firms’ final salary transfers during the current financial year.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.