The City watchdog has been told it should review pension transfer rules based on the assumption final salary to defined contribution transfers will not be in the client’s best interests in light of pension freedoms.
Mike Morrison, pension expert at AJ Bell, said the FCA rules still stipulate that an assessment of defined benefit to defined contribution transfers must start with the assumption that it will not be in the client’s best interests.
He said this now feels outdated in the post-pension freedoms market and at a time when many defined benefit schemes are in deficit.
He claimed this presumption also introduces a regulatory bias in that many advisers will not advise on such transfers because to advise properly might mean having to go against the presumption.
The FCA declined to respond to Mr Morrison’s remark that their pension transfer rules introduced “regulatory bias.”
Mr Morrison recommended a review of the transfer rules presumption so that each case can be considered on its merits and the specific rights of the defined benefit scheme member can fully be considered.
The regulator again declined to comment.
Mr Morrison said: “It is vitally important to consider the defined benefit guarantee but in the time of pension freedom should we be treating DB and DC any differently?
“When we spoke to financial advisers about this, half of them said they did not think this assumption was valid in today’s market so there is definitely demand for the regulator to have another look at this area.
“The answer in the majority of cases is still likely to favour the guaranteed benefits of a DB scheme but there may be cases where more flexibility can deliver a better outcome for the client.
“For example, wider availability of partial transfers from DB to DC schemes could deliver benefits to clients, advisers and pension schemes.
“For clients and advisers they avoid the current ‘cliff edge’ decision they face when deciding to make a transfer. Clients would get greater flexibility and choice. Advisers would be able to meet a wider range of client needs without it being an all or nothing decision.
“From the employer perspective there is the benefit of de-risking and potentially cost saving resulting from reduced pension liabilities.
“As scheme members already have a right to a full transfer there is no obvious reason why the right to a partial transfer should not be offered.
“It might mean a rule amendment as well as some extra admin and actuarial calculations but this is done already for full pension transfers, so shouldn’t be a show stopper.”
Last month the government announced it was investigating whether to limit the right of individuals to transfer their pension to some occupational schemes, as well as a ban on pension cold calling, to stop fraudsters.
In November last year, the government confirmed it would ban pensions cold calling, after a parliamentary petition launched by a financial adviser put the issue into the spotlight two months before.
The consultation is looking at making it harder for fraudsters to open small pension schemes that people are then encouraged to transfer into, with the money then siphoned off.
According to the government, limiting the right to transfer to some occupational pension schemes will address one of the key routes used to access people's pension savings through a fraudulent pension scheme.
Many stakeholders have asked for the law to be changed, so that firms and trustees can block pension transfers when there are concerns over the legitimacy of the receiving vehicle.
Jon Hatchett, head of corporate consulting at pensions consultancy Hymans Robertson, said he expects 2017 could be the year when we see greater volumes of DB transfer activity post pension freedoms.
He said: "Transfer uptake from DB schemes roughly doubled in the year following freedom and choice, and then continued to rise another 15 per cent over the following year.
"This could well be the year where ensuring members know their options at retirement becomes normal and we could easily see uptake double again.”
emma.hughes@ft.com
