Pension experts have been quick to pick out the holes in the Financial Conduct Authority's plans for new pension transfer advice rules.
Proposals outlined in a 65-page consultation paper include replacing the current transfer value analysis requirement (TVA) with a comparison showing the value of the benefits being given up plus introducing a rule to require all advice in this area to be provided as a personal recommendation, which fully reflects the client’s circumstances and provides a recommended course of action.
As explained earlier by FTAdviser, the FCA will also update their definition of what is expected of the role of a pension transfer specialist.
However experts FTAdviser spoke to were able to point out where the FCA has failed to offer the clarity needed to encourage more pension transfer specialists to handle the surge in interest in pulling cash out of defined benefit schemes into defined contribution schemes.
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.
David Fairs, pensions partner at KPMG, said: "The change in approach from the FCA is welcome although long overdue. It recognises that many transfers are to take advantage of the flexibility under Freedom and Choice.
"However, the current process is still very cumbersome and the government could make the process much simpler if it permitted defined benefit schemes to offer flexibilities directly to members.
"That would be good news for members, good for schemes and the oversight from trustees would be an added layer of protection for members."
Scandal fails to be averted
Tom McPhail, senior policy analyst, at Hargreaves Lansdown, also sounded a note of caution about whether the new rules will prevent another pensions scandal.
He said: "Pension transfer data is often confusing, misleading or incorrect. Advice requirements shouldn't be reduced until data quality is improved."
While Steve Webb, director of policy at Royal London and former pensions minister, welcomed the proposals as with the advent of pension freedoms, the issues around the pros and cons of transfers have changed, he questioned the timetable for updating the advice framework.
Mr Webb said: "With new rules unlikely to be in place until 2018, however, the FCA needs to be clear about how far advisers giving advice this year should be taking account of the ideas in this consultation paper."
Greater advice access
But Steven Cameron, pensions director at Aegon, said the rules should improve things as advisers have currently been faced with second guessing what the FCA considers as suitable advice including how to allow for the pension freedoms those in defined contribution (DC) schemes now enjoy.
Mr Cameron said: “Against a backdrop of regulatory uncertainty, understandable reluctance from many advisers means the supply of advice is falling far short of demand, creating the risk that many individuals are not getting the support they need to make the right choice.
“People used to transfer out of DB schemes in the hope of securing a higher retirement income through an annuity but now, their objective is often to access the government’s pension freedoms which have proved popular with their DC pensioner peers.
“If the primary objective is flexibility, advice shouldn’t be based solely on the likelihood the transfer value will secure an annuity at scheme pension age above the DB benefit given up.
"Advisers quite rightly need to explore wider objectives and the additional value to the individual offered by pension freedoms, such as choosing when to start taking an income, how to shape income year on year and leaving funds to loved ones.
"This consultation provides the opportunity for the industry and the regulator to reset ‘what good looks like’.
“While this is a complex area and can’t be rushed, the FCA’s timeline means final rules won’t be provided until next year. We need to explore if there are interim solutions which can give advisers confidence in the meantime to meet current consumer demand.”
Stephen Scholefield, pensions partner at international law firm Pinsent Masons, said: “The FCA’s proposal would require those considering a transfer to be given a personal recommendation, resulting in well-rounded advice that takes account of an individual’s personal circumstances.
"This is a welcome development. It would give individuals confidence in the advice they receive and the decisions they make about what is often their largest asset. It would also give the adviser community a clear framework against which they could assess their advice, reducing the risk of another mis-selling scandal. ”
FCA tight rope
Malcolm McLean, senior consultant at Barnett Waddingham, said what was clear from the 65-page consultation paper published today (21 June), which asked should pension transfer specialists have to obtain investment qualifications, is the FCA is clearly trying to walk a bit of a tightrope in this tricky area.
He said: “The proposals are designed to increase the quality of advice given to consumers, provide greater consumer protection and give firms greater clarity about the regulator’s intentions.
"At the same time the FCA is at pains to point out they would not wish to drive firms out of the market, which any over-prescriptive regulation might have the potential to do.
“The redefinition of the starting point for considering whether the transfer would be in the best interest of the consumer is rather wishy–washy and does not appear to change the emphasis overmuch.
“The important point, however, is the FCA is not dismissive of defined benefit to defined contribution transfers per se.
"The introduction of pension freedoms has changed the environment quite substantially compared to the past.
"In some cases the transfer can be of value to the member, taking into account other factors such as the need for income, life expectancy, family needs and so on.
"Partial transfers also have much to commend them which allow members to take their benefits in a way which suits them without taking on all the risk of a full transfer.”
Better late than never
Bart Huby, partner at consulting actuaries LCP, said the proposals are long over due.
The FCA rules need now to catch up with the much more flexible pensions regime the government introduced back in 2015.
He said: "We're particularly pleased that they are proposing to drop the now discredited "TVAS" which is disliked by financial advisers - and not understood by most pension scheme members - and we hope that a replacement can be developed that is much more helpful to everyone involved.
"Our analysis and experience shows that member interest in transfers has more than trebled in recent years.
"It is therefore really important the FCA get their rules right to enable financial advisers to better support the growing interest of many pension scheme members in being able to access the new pension flexibilities.”
stephanie.hawthorne@ft.com
