The continually shifting pensions landscape is the focus of the latest Inside FCA podcast.
One of the regulator’s key messages on pensions is conveyed in the video by Chris McGrath, Head of Investment Intermediaries and Scams at the FCA. He notes that firms are instructed not to advise a client to transfer out of a defined benefit (DB) scheme unless there are specific circumstances that justify such a recommendation. At the same time, he says that many firms are still recommending that the majority, or all, of their clients transfer out of their DB arrangement. Mr McGrath suggests that this situation represents something of a contradiction.
The first item in the podcast is an acknowledgement that consumer choice in the pensions sector has increased dramatically. Not so very long ago, retirees would either receive an income for life based on the number of years they had been with their employer or would receive a fixed income for life via an annuity. Now, not only are there considerably fewer defined benefit occupational schemes, but consumers have a myriad of options, such as entering into a drawdown arrangement, or even withdrawing all of their retirement savings as cash, all at a time when life expectancy is rising, and individuals can expect their retirement to last much longer.
Mr McGrath mentioned that whether to transfer a pension or not is “a very complex decision” and commented that “sometimes advisors aren’t always giving the best advice.”
He added that FCA reviews of the investment advice given by firms showed that in around 90% of cases, the regulator believed the advice given by the firm was suitable. Mr McGrath then said that the equivalent figure for pension transfer advice was just 50%, which he described as “simply not good enough”. Another statistic quoted by Mr McGrath is that the FCA assessed the pension transfer advice of 63 firms last year, and that 24 firms – more than one-third of the total – had practices that were so poor that the regulator had to impose a suspension, preventing the firms from giving transfer advice until they have satisfied the FCA that their procedures and practices will deliver favourable client outcomes.
Mr McGrath went further and questioned the motives of advisers who recommend pension transfers. He referred to “firms that have not managed the conflict between the fees they charged often on a contingent basis and what is the best interest of their client individually” and highlighted the FCA’s proposal to ban contingent charging arrangements – this is where the adviser will only receive a fee from their client should a transfer take place.
Emma Stranack, the FCA’s Head of Business and Consumer Communications, highlighted that the pension freedoms introduced in 2015 had led to an increase in scams and pension-related fraud. She referred to the activities of scammers “providing potential lucrative opportunities for people that are tempting, they have very sophisticated websites” and mentioned the FCA’s ScamSmart campaign that aims to educate consumers and allow them to identify when an investment opportunity may be too good to be true.
The FCA also obtained an external view by asking Keith Richards to contribute to the podcast. As the head of the Personal Finance Society, a trade association that represents advisory firms, he re-iterated the FCA’s central position on transfers, saying:
“The starting point is generally it’s not going to be in most people’s best interest to give up the safeguarded benefits that that scheme provides.”
However, Mr Richards commented that the FCA’s close scrutiny of pension transfer advice was increasing professional indemnity insurance premiums, and he claimed that some firms have been forced to exit the market as they had been unable to obtain any insurance.
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