Defined Benefit  

Old Mutual on how to meet FCA's pension transfer rules

Old Mutual on how to meet FCA's pension transfer rules

Advisers carrying out defined benefit transfers need to consider how the pension cash will be invested to avoid complaints, a pension specialist has said.

Speaking at the Personal Finance Society’s Festival of Financial Planning, Martin Clubbs, pensions specialist of Old Mutual Wealth, said advisers need to consider inflation, the client’s needs, the expected returns and the long-term sustainability of the savings.

He gave the example of two fictional investors with pension savings of £400,000, retiring at 65 in a portfolio with the same average return but the first has volatility while the second does not.

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Mr Clubbs said: “For client A they have run out of money by the time they are 81-years-old but client B is still going strongly at age 87.

“We have had a great run on markets, which is why this issue has not been given the focus it deserves but you should make sure it is at the forefront of the process.”

He said the question of how money from DB transfers is invested is “very much on the radar” of the Financial Conduct Authority.

Mr Clubbs said advisers who do not consider this issue are opening themselves up to “failure”.

He said: “Success or failure, complaint or no complaint, is going to be driven by the investment solution you recommend.”

Earlier this year the FCA published a consultation paper on advising on pension transfers, which proposed additional guidance.

This would make clear that in order to provide a suitable personal recommendation, an adviser should consider the specific receiving scheme following the transfer and the investments being recommended within that scheme.

It also asked whether pension transfer specialists should also be qualified investment advisers, since advice on transferring a defined benefit pension will often involve investment advice.

Mr Clubbs said clients bring “emotional baggage” to the issue of DB transfers and the receipt of a statement of entitlement can often sway a client’s decision.

He said: “DB transfers is not only about the process. There is a huge education piece of work to do during it to recognise the biases and manage those biases.

“This could be a 30 to 35-year or even a 40-year process.”

Last week FTAdviser revealed former Financial Conduct Authority (FCA) technical specialist Rory Percival has outlined how advisers can avoid the regulatory pitfalls when advising on defined benefit pension transfers. 

To evidence the basis for their recommendations, Mr Percival has said financial advisers should produce reports for each time they advise a client to stick with a defined benefit (DB) pension, as well as when they encourage them to transfer out.

Speaking at a seminar for advisers organised by Prudential in London, Mr Percival said "giving advice to stay is probably as risky as giving advice to transfer".

He said: "Personally, I think you should do that [the recommendation to stay in the scheme] more formally, and write the client a letter or an email explaining that [decision].