The FCA has issued a pair of cautionary statements on defined benefit (DB) transfers, setting out its expectation to firms and issuing a warning notice relating to 500 transfers.
In a busy month for DB schemes, which also saw the government issue its long-awaited green paper on the subject, the regulator said it had warned an individual over the transfer of £12.7m in DB assets to a defined contribution (DC) scheme.
Many of those members were at “serious risk of receiving unsuitable advice”, the FCA said, although it did not name the individual concerned.
Earlier, on January 24, the regulator had suggested that switches were being advised without due consideration for the client’s future assets.
Its Advising on pension transfers – our expectations report came amid a surge in pension transfers enquiries following the introduction of pension freedoms and plunging gilt yields.
Firms have been warned not to “undertake comparisons using generic assumptions for hypothetical receiving schemes” and must analyse expected returns of both the current and proposed plans. The regulator also stressed that justifying transfers solely on critical yields is not acceptable, and consideration must also be given to the client’s personal circumstances.
It stated that a pension transfer specialist must be involved in the process, but they are not required to take ownership of the advice.
“Many advisers live in fear of DB transfers as the potential claim value if the economic environment or a client situation changes is so high,” said Hayley North, chartered financial planner at Rose & North.
Ms North added this is partly due to insistent clients often lacking a basic understanding of regulatory issues and the risk for advisers.
She felt this is something the FCA should seek to address. “This needs to be communicated better to consumers. There needs to be a way of mitigating the risks for advisers to ensure there is enough DB advice to go around,” she said.
Meanwhile, the Chartered Insurance Institute has announced plans for new pension transfer qualifications, which is due for enrolment this July.
Kate Smith, head of pensions at Aegon, noted that FCA permissions are mandatory for those who are providing transfer advice, but she said advisers would benefit from the qualifications. “We are seeing more demand from consumers who want to do these transfers, so we need more advisers to be able to do it.”
With many advisers expecting the FCA to increase its scrutiny of transfers in the coming months, Ms North added: “The FCA should be focused on putting bad advisers out of business, not making good advice impossible.”
The latest moves come amid a hectic few weeks for DB pensions policy. The green paper issued by the government in late February proposed allowing UK firms that are in financial difficulty to pay less generous inflation-linked increases to pensioners.
However, the paper, which is up for consultation, concluded that there was “no case for fundamental change” to the DB system.