The Financial Conduct Authority has confirmed that it is maintaining its stance that continued membership of a final salary (defined benefit) pension scheme is the best course of action for most pension savers.
The FCA has this to say about defined benefit pension schemes:
“It remains our view that it is in the best interest of most consumers to stay in their DB pension. Where an individual seeks advice to transfer, we expect firms to give advice that is suitable and appropriate for their needs and situation.”
The regulator also adds that it is taking “significant supervisory and enforcement action” against firms which fail to meet the standards expected when giving pension transfer advice.
This comes as the FCA publishes its Finalised Guidance on pension transfer advice. The publication of the guidance is accompanied by a warning about what it has seen all too often from firms in the past:
“Our work on defined benefit (DB) transfer advice shows many firms are struggling to give consistent, suitable advice. This is largely due to poor practices or weak record keeping. As a result, too much of the DB transfer advice we see is either unsuitable or we were unable to assess its suitability due to material information gaps.”
The impact of unsuitable DB transfer advice on consumers is undoubtedly significant. By transferring out, they give up a guaranteed income, and also start to bear the risk of how their pension investments will perform and whether these will provide the income they need for the rest of their life. It is therefore not surprising that the FCA considers DB transfers to be a priority area, or that it has taken enforcement action against firms on numerous occasions over this matter.
When giving full advice on a DB transfer, there will normally be two elements to the advice the firm provides:
- Whether to give up safeguarded benefits, such as Guaranteed Annuity Rates and Guaranteed Minimum Pensions
- Where to transfer the funds to, should a transfer proceed
A transfer value analysis should form part of any full DB advice process, and this must include a comparison showing the value of the benefits being given up. It will be necessary for firms to calculate the cost to the customer of buying the same income via an annuity that they would have expected to receive via the DB scheme.
A firm’s fact finding is likely to encompass:
- Level of investment experience
- Tax position
- Attitude to risk
- Capacity for loss
- Marital status
- Income and expenditure levels (both now and in retirement)
- Target retirement income
- Whether there is a need to provide for a spouse and/or dependants in retirement
- Likely retirement age
For DB transfer advice where a personal recommendation is made, firms must always provide a suitability report, even where they are not recommending a transfer.
It is no longer permitted to charge different levels of fees to clients dependent on whether the transfer proceeds.
Within firms that give pension transfer advice, the Pension Transfer Specialist has an important role to play in checking that the advisers have given suitable advice. The PTS must undertake an additional 15 hours of Continuing Professional Development each year that is directly related to their role as a PTS. The PTS role falls under the Certification element of the Senior Managers & Certification Regime, so firms are responsible for carrying out an annual assessment to satisfy themselves that their PTS remains competent.
In addition to concerns over the advice firms are providing, the FCA also comments on the content of firms’ financial promotions relating to transfers. In general, across the product range, promotions should prominently mention any relevant risks when highlighting any potential benefits. The FCA is concerned about advertisements and websites that refer to the benefits of pension flexibilities and investors having control over their own money, without also explaining the risks.