Right to be reluctant to advise on pension transfers

This week the Financial Conduct Authority finally delivered proposals for new rules for defined benefit pension transfers in a case of “better late than never.”

Since the introduction of the pension freedoms in April 2015, consumers have more options available to access their pension savings. 

Previously, pension savings could only be used to provide an income in retirement (through an annuity or drawdown). 

Pension savings can now be accessed as income or cash. DB pensions must be transferred to a defined contribution (DC) scheme to access the savings other than through the scheme pension.

This has combined with more recent changes to the financial environment leading to historically high levels of transfer values.

The demise of the likes of BHS means once golden DB pensions are increasingly tarnished these days.

Employers are keen to get rid of the great weight of final salary schemes from around their necks so are offering fantastic transfer values plus we now have pension freedoms.

I still fear clients keen to grab cash today will forget how desperate they were to pull their pennies out of their pension when they are sat afraid to turn on the central heating in old age.

As a result to stick with DB or to ditch DB – that has been the question on everyone’s lips this year.

The regulator still believes sticking with a scheme with guaranteed income is the right decision for most of your clients but it is a massive shift that this week it revealed it plans to rewrite the rules to recognise pension transfers could be right for some personal circumstances.

The regulator proposed a new way of doing transfer value analysis and pushed that recommendations must be personal.

But do these proposed new rules reassure you that if you follow them there is no risk of retrospective retribution?

Advisers must make a personal recommendation but the paper is light on detail of what the FCA considers an intermediary must do to make it crystal clear to clients what they may be giving up if they turn their back on defined benefit schemes.

To reassure advisers, the regulator needs to state so long as the nature of any guarantees which might be forgone, personal priorities for cash flow flexibility and risk appetite is clearly spelled out then a client has no recourse.

Even with the new rules, I still fear clients keen to grab cash today will forget how desperate they were to pull their pennies out of their pension when they are sat afraid to turn on the central heating in old age.

I fear the ombudsman will believe some of these people who will swear there was no way they would have pulled cash out of a pension scheme that guaranteed them an income if they knew they could be left cold, afraid and alone in retirement.

The regulator has got so much right with these new rules but it needs to do more to make sure advisers can feel confident if they do assist their clients with assessing whether they should stick with defined benefit schemes this doesn’t come back to bite them on the backside. 

The new rules state there must be an assessment of transfer values against alternative guaranteed future income and this should only be one input to the analyses required.

A more complete picture and decision can only be reached having fully considered all relevant personal circumstances and prioritised goals including flexibility required, future market scenarios, other sources of income and assets, tax implications, risk appetite and capacity for loss.

But what weight should the different parts of the picture play in an adviser’s decision whether to recommend or try to discourage a final salary pension transfer?

That is not made crystal clear by the FCA’s consultation paper on new rules for pension transfers.

So, while I applaud the regulator for finally acknowledging defined benefit is not the ultimate solution for all that it was once was I feel more reassurances and clarity is needed for advisers to be confident in talking about transfers.

emma.hughes@ft.com