The Financial Conduct Authority (FCA) has published new rules on pension transfer advice requiring that individuals’ specific circumstances are taken into consideration.
The new rules, which follow on from a consultation originally proposing the changes in June 2017, will apply for advice on transfers from safeguarded benefit schemes, for example transfers from defined benefit (DB) pension schemes to defined contribution (DC) arrangements.
Transfer advice will need to be provided as a personal recommendation that takes into account pension members individual circumstances. The rules additionally replace the current transfer value analysis with a personalised analysis of an individual’s options, as well as requires a comparison to show the value of the benefits being given up.
A further consultation has been launched by the FCA exploring alternative options for how advisers are paid, to mitigate potential conflicts of interest when advisers provide pension transfer advice. Possible changes could include a ban on contingent charging, which is when a fee for advice is only paid when a transfer goes ahead.
The consultation also proposes that advisers who deliver pension transfer advice will need to have the same qualifications as investment advisers.
The FCA has maintained its position that advisers should initially assume that a DB pension transfer will be unsuitable. This is to reflect the high amount of unsuitable advice that has been seen in supervisory work as well as takes into account the need for further consideration of how transfer advice should be paid for. This stance does not prevent an adviser recommending a transfer where suitable.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Defined benefit pensions are valuable so most people will be best advised to keep them. However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.
“We are also looking at whether further changes are needed to improve the quality of advice in this area. In particular, we recognise that there is an inherent conflict of interest when advisers use a contingent charging model so we are asking for views on whether we should ban contingent fees for pension transfer advice. Defined benefit pension transfer advice continues to be a key area of focus for the FCA.”
Steven Cameron, pensions director at Aegon, added: “[The] new publication from the FCA on advising on defined benefit transfers should be welcomed by advisers and consumers alike. Demand for advice on DB transfers has never been higher and the FCA has now set out clearly ‘what good looks like’ allowing advisers to meet demands from their clients with confidence.
“The new approach offers a clear framework and methodology for taking into account all of a client’s circumstances and needs. Moving away from the outdated transfer value analysis allows proper reflection of the potential benefits of pension freedoms. And showing in pounds and pence the difference between the transfer value on offer and how much it would cost to replace scheme benefits, albeit still with an annuity, will aid consumer understanding.
“Transferring is certainly not right for everyone, so it’s helpful that the FCA is consulting on a formal ‘triage’ service, allowing firms to offer generic, balanced information on the pros and cons of transferring without crossing into advice. This has the potential to save both advisers and their clients time and money.
“Following recent concerns, we’re pleased the FCA is looking in detail at contingent charging on DB transfers, and how potential conflicts can be addressed. This approach to charging does appeal to certain customer segments so an outright ban could widen the advice gap. The proposed triage service has the potential for those customers for whom transferring is unlikely to meet their needs to ‘self-select’ away from advice at an early stage.
“We expect many firms will continue to use a ‘two adviser model’ and we welcome the FCA offering greater clarity on its expectations for each party and how they should work together for the benefit of the customer.”
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The regulator has announced that defined benefit transfers are for the few not the many, by keeping in place it’s assumption that they are generally not in people’s best interests. These types of pensions offer a valuable promise to provide income in retirement and do not expose members to the vagaries of the stock market or interest rate movements.
"Transfers to more modern defined contribution pensions can provide greater flexibility in retirement, but few people come to retirement with only a defined benefit pension and transfer values are not generally adequate compensation for leaving, meaning most people are best off staying put. This announcement is a positive for ensuring retirees are adequately protected.”
