Pension transfers rules need a rethink

“A firm should only then consider a transfer... if it can clearly demonstrate, on contemporary evidence, that the transfer ... is in the client’s best interests.”

The FCA rules go on to state: “When giving a personal recommendation about a pension transfer, a firm should clearly inform the retail client about ... the consequent transfer of risk from the defined benefits pension scheme ... to the retail client.

“Including the extent to which benefits may fall short of replicating those in the defined benefits pension scheme ...

“In considering whether to make a personal recommendation, a firm should not regard a rate of return which may replicate the benefits being given up from the defined benefits pension scheme or other scheme with safeguarded benefits as sufficient in itself.”

These days some of those final salary promises look more like a hope than a guarantee

So, basically the client’s best interests will be served if you can find a defined contribution scheme that will secure a greater retirement income than the final salary scheme you would be giving up.

My reading of the rules seems to be supported by the Financial Ombudsman Service decision FTAdviser reported this week where an adviser was told they were wrong to recommend a “high risk” transfer from a DB to DC scheme.

In order to make the decision to transfer worthwhile and to ensure that benefits on retirement were greater than those that were being given up, the ombudsman said a return of say 1 per cent or 2 per cent more was going to be required.

Years ago, these pension transfer rules made total sense as a final salary promise was just that – a promise.

These days some of those final salary promises look more like a hope than a guarantee.

Increasingly savers and MPs are aware of this fact and I think it is time the pension transfer rules better reflected this fact.

Headlines like those surrounding the demise of BHS and other high street retail giants mean I haven’t been to a retirement income event open to the public in the last few years that hasn’t seen a question asked about pension transfers.

Frank Field MP has rightly identified that a defined benefit pension isn’t as sure a thing as it once did.

Mr Field, who is work and pensions select committee chairman, plans to put a radical new bill before MPs, which could see defined benefit pension scheme members face cuts to their promised retirement incomes.

Members of final salary company pensions must face the fact their schemes may never meet their liabilities, and adjust them to more realistic levels, Mr Field said.

It isn’t just savers expectations that need to be adjusted to more realistic levels. I feel it is time pension transfer rules are changed.

Post April 2015’s pension freedoms, there are now more reasons to transfer from a defined benefit to a defined contribution scheme than there would have been when the rules were first created.

Yes, every case must be looked at on its own merits and the individual with the final salary pension needs to give robust and suitable reason for requesting a transfer in the first place.

Calculations should be made but these must factor in not just the value being offered for a DB pot today versus potential returns of a defined contribution scheme.

When considering a transfer the current funding of the scheme and whether such a transfer amount may go up or down in the future must be factored in.

In an article for FTAdviser, AJBell’s Mike Morrison points out the regulator’s pension transfer rules are based on “a pre-pension freedoms presumption.”

In his article, which you can read by clicking here and can earn CPD for, Mr Morrison said we now have a retirement regime where there is no requirement to buy a guaranteed income for life and where spending the pension money is a valid option.

Ultimately pension transfer rules need a rethink as the basis they were built on – you were giving up a guarantee for a bet on the markets – is no longer always accurate.

It is wrong to continue to hold final salary schemes as the gold standard and defined contribution as a poor substitute.

Many final salary schemes - civil servants ones excluded - are far from certain these days.