Avoiding the next scandal

Alison Steed

Alison Steed

Pension transfers are under the regulator’s spotlight and the investigative work done so far is not good reading for advisers undertaking this type of work.

Fewer than half of the defined benefit (DB) transfers undertaken since October 2015 have been suitable, according to the Financial Conduct Authority’s (FCA) figures. Some 17 per cent were unsuitable and the remaining 36 per cent were classified as “unclear whether the recommendation was suitable”.

When it comes to the product the individual was placed into instead of the DB scheme, it was identified that 35 per cent were suitable, 24 per cent were unsuitable and 40 per cent – that is not a typo – were “unclear”. So, yes, more products that were sold to individuals were considered unclear than suitable. Taking the unsuitable products into account, nearly two thirds of the products sold were questionable in some way.

Key points

  • Fewer than half of DB transfers undertaken since October 2015 have been suitable, according to FCA figures
  • Advising on DB transfers is always going to be tricky because DB pensions are considered the "gold standard"
  • The FCA warned advisers to compare returns on funds the client was going to be investing in, not on a generic assumption

The figures are quite astonishing when you think about it – and these percentages are based on a total of 88 transfers where the recommendation was to transfer out of the DB scheme.

From the FCA’s information, it seems as though this has more to do with the information being gleaned by advisers about their clients’ needs than anything else. It appears some fundamental questions were not being asked, such as where the transfer proceeds would ultimately be invested, or enough information about the client’s needs, objectives and personal circumstances.

Given the general advisory market review by the FCA for pensions advice found that 90 per cent of pensions accumulation advice and 91 per cent of retirement income advice was suitable, this difference in DB transfers is frankly shocking.

The FCA said in its report: “Firms must make sure that their personal recommendations are suitable for their clients. However, many firms had designed processes and procedures which result in transfers where the suitability of advice could not be established by the firm.”

This, it said, included firms:

  • Failing to obtain enough information about clients’ needs and personal circumstances
  • Failing to consider the needs of the client alongside the client’s objectives when making a recommendation
  • Not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits

So, “in some cases advisers had failed to make appropriate comparisons between the defined benefit scheme and the intended receiving scheme”, according to the FCA. This in turn meant advice was based on incorrect or inaccurate comparisons.

Tough talking from the regulator, which is no surprise really. Advising on DB transfers is always going to be a relatively tricky area because DB pensions are considered the "gold standard" as the employer takes all of the investment risk while the employee takes none. 

The FCA even put out an alert on 24 January this year outlining its concerns about the practice of advising on DB transfers and what it would expect when considering the pros and cons for each client.

The alert highlighted concerns about firms that were advising on pension transfers or switches without “considering the assets in which their client’s funds will be invested”. It raised the prospect of unsuitable investment choices, or worse, that clients were being “scammed”.