FCA's fresh pension transfer stance under fire

In its response to the Financial Conduct Authority's (FCA's) consultation paper CP17/16, Advising on Pension Transfers, which closed on 21 September, the pension software provider claimed the City watchdog had failed to create a "neutral" starting point.

It said while the regulator had softened its original stance, in that previously the FCA deemed the base case for all defined benefit (DB) transfers to be not in the client's best interests, the proposal outlined in the 65-page consultation would not make advising on transfers less restrictive.

According to CTC in its submission: "Although we welcome the overall guidance, we remain unhappy the 'suitability' starting point is unduly restrictive.

"Although removing the statement that a transfer should be assumed to be unsuitable, and then stating the adviser's assessment on a case-by-case basis should start from a neutral starting position, the FCA has reiterated that 'a firm should have regard to the likelihood it will be in the best interests of the majority of consumers to obtain, or retain, safeguarded benefits'. 

"This is not a neutral starting point". 

For example, CTC said if an adviser were to follow the requirements laid out in the FCA's consultation paper, then the personal recommendation "would put the value of any safeguarded benefits being given up into the context of the client's own needs and objectives".

It says it will be in the best interests of "the majority" to retain their safeguarded benefits. Well, as we know [from Brexit], 52 per cent is a majority. Nigel Chambers

This would not make the process much easier for advisers.

Nigel Chambers, co-founder of CTC, commented that the point of the pension freedom and choice regime is to give people more control over their pension pots, and more flexibility in terms of how they take their money in retirement.

He told FTAdviser: "The regulator's original starting-point on defined benefit transfers was that they are not suitable. 

"While this has softened slightly to 'neutral', it does not allow for consideration that it could be in the best interest of the client's objectives and needs.

"Instead it says it will be in the best interests of "the majority" to retain their safeguarded benefits. Well, as we know [from Brexit], 52 per cent is a majority."

Mr Chambers said, there could be many instances where it would be inadvisable to give people index-linked income well into their 90s.

"Index-linked income is not much use at a time of needing long-term care", he said. Instead, it could be better for people to transfer into a defined contribution style arrangement.

This would allow consumers to draw their tax-free cash lump sum and then leave the whole of the balance of the money invested for later use.

Mr Chambers added: "Flexibility and control is particularly valued by consumers."

However, there is still an issue with many people being encouraged to give up their safeguarded benefits when it is not in their best interests, according to Keith Richards, chief executive of the Personal Finance Society.

This means advisers still have a duty to discourage transfers where it might not be in their best interests, as doing otherwise could pose a problem for advisers.

He told FTAdviser: "The guarantees associated with such schemes need to be understood properly.

"Where conflicts of interest exist, an adviser needs to be extra vigilant to demonstrate mitigation. 

"For example, facilitating an insistent transfer against their advice and in the best interests of the client, where the adviser was dependent on the transfer to facilitate an initial fee, and continues to charge an ongoing fee for managing the transferred funds, will cloud future judgement in the event of a mis-selling claim."

Other points raised in CTC's response to the paper were that it welcomed the FCA's proposal to require all advice on the conversion or transfer of safeguarded benefits to be a personal recommendation.

Where conflicts of interest exist, an adviser needs to be extra vigilant to demonstrate mitigation. Keith Richards

The response, however, bore a caveat: "If the focus of the financial analysis is too firmly pinned to the importance of guaranteed income at extremely old ages, when most consumers put a greater 'utility value' of money available in the early years of retirement, this will increase the potential for consumers being deemed as 'insistent clients'. 

"This would be a most unfortunate outcome."

CTC also fully supported the FCA's proposed approach to introduce an appropriate transfer analysis, although in response to the proposal on giving clients a mandatory Transfer Value Comparator, CTC commented this was a "disappointment".

The response stated: "The TVC is built on the assumption that an annuity is purchased where, unless they are in ill-health, any consumer considering a transfer is almost certain to opt for some form of drawdown arrangement in the expectation of higher returns than those underlying the purchase of an annuity."

While the TVC's use of a clear assumption as to the growth rate is likely to be beneficial, CTC warned: "We have long been concerned with the fact different providers use different growth rate assumptions for similar investments."

simoney.kyriakou@ft.com