The way pension transfers are being handled for some steel workers proves the Financial Conduct Authority is right to continue to investigate this area.
Earlier this week, Megan Butler, executive director of supervision for the investment wholesale and specialists division at the Financial Conduct Authority (FCA), revealed how the watchdog would continue to probe pension transfer specialists.
Over the past two years, the FCA has done detailed data collections of firms most active in the pension transfer area and visited a dozen firms.
These visits, alongside data requests, found advice in more than half of defined benefit pension (DB) transfers where the recommendation was to move the retirement pot was unsuitable or unclear.
From a total of 88 DB transfers analysed by the watchdog since October 2015, only 47 per cent were suitable.
The regulator found that 17 per cent were unsuitable and in the remaining 36 per cent suitability was unclear.
Some advisers are continuing to just permit a transfer because it is what the client wants rather than what they need. The visits also resulted in four businesses no longer advising on pension transfers.
Speaking at the Personal Investment Management & Financial Advice Association (Pimfa) annual summit, Ms Butler said the root cause of a lot of these issues related to the business model in this area between the introducing firm and the transfer specialist.
She said this business model was becoming “industrialised” and “commoditised” rather than focusing on the individual client’s needs.
She said the FCA will now take what has been done with the smaller group and roll this work out to "the wider group also active in the area" of pension transfers.
As well as checking what is going on in the wider pension transfer industry, Ms Butler added the regulator is still actively considering “what more can be done in this area across the broader population”.
More clearly does need to be done if the FCA is to protect consumer's finances from themselves.
Despite the number of pension transfer specialists shutting up shop this year and the FCA’s repeated comments about what it expects in this area, some advisers are continuing to just permit a transfer because it is what the client wants rather than what they need.
Yesterday (9 November) FTAdviser reported pensions expert and founder of Pension Playpen Henry Tapper had seen little evidence of financial advisers suggesting anything other than transfers to members of the British Steel Pension Scheme (BSPS).
Mr Tapper and Al Rush, principal at Rutland-based Echelon Wealthcare, spent Wednesday (8 November) at Port Talbot in Wales speaking to defined benefit (DB) scheme members.
Around 130,000 individuals will have to choose to move their pension pots to a new plan being created, BSPS II, or stay in the current fund, which will be moved to the Pension Protection Fund (PPF).
In August, Tata Steel UK (TSUK) got the go-ahead to offload BSPS and create a new defined benefit fund.
As part of the deal, The Pension Regulator gave its formal approval to a regulated apportionment arrangement (RAA).
More than 7,000 members of the scheme have requested a transfer value quotation between April and September this year, with more than 700 requests totalling more than £200m being concluded or processed during that period.
The BSPS members Mr Tapper and Mr Rush encountered weren’t able to explain the basis of the adviser’s recommendation for the transfer.
Mr Tapper said: “We did not see any evidence of cash-flow modelling by advisers.
“We found little understanding of the risks of drawdown. We did not hear one mention of annuities.
“While people were generally aware about the PPF, BSPS and BSPS II, we found there was little awareness of the risks of what they were transferring to and considerable trust that the financial adviser would take care.”
This doesn’t surprise me at all as other pension transfer specialists I have spoken to who have encountered British Steel workers have told me these individuals do not want advice.
They are sick and tired and afraid their pension could disappear overnight so they don’t want to hear what an adviser has to say. They just want the cash in their hands to shove under the mattress right now.
They don’t want to hear about the pros and cons of staying put with their pension scheme. They have had enough. The regulator needs to factor the fears of many defined benefit pension scheme members in to their work in this area.
What can an adviser do when the client just won’t listen to reason? All an adviser can do is refuse to recommend the transfer but clearly that won’t be the end of things.
If you won't allow the client to transfer their pension then, if they are scared enough about losing their defined benefit pot, they will go elsewhere in the hope of finding someone who will sign off their pension transfer.
Ultimately, is it wrong that the consumer has the choice to do that? Buying cigarettes is bad for you but the government doesn’t prevent you from smoking.
The FCA is tasked with protecting the consumer so it will have to continue to try and save them from themselves in making sure advice rules don't allow them to easily abandon pension guarantees.
But, really should they be forcing advisers to save these people's finances from themselves?
If it makes these steel workers happier to think their pension is now in their own hands, rather than still in a defined benefit scheme, shouldn't they be allowed to grab the cash?
emma.hughes@ft.com
