The new rule, which says advisers should only reference the pensions lifeboat protections if they have “specialist knowledge in assessing the impact” of these in their clients benefits, comes to force in October, according to the Financial Conduct Authority (FCA) policy paper on DB transfers.
Advisers should present information in the appropriate pension transfer analysis (Apta) regarding the PPF protections according to the “fair, clear and not misleading rule,” and “do so in a way that is balanced and objective,” the watchdog said.
The updated rule from the FCA comes amid concern pension scheme members are being encouraged to transfer out of schemes which are set to enter the PPF, out of the misplaced fear they will lose a large chunk of their benefits, even if a transfer was not necessarily in their best interests.
Rory Percival, former technical specialist at the FCA, who now runs his own consultancy, said the regulator is “concerned that some advisers may downplay the benefits of, say, the PPF”.
In fact UK the pensions lifeboat will pay 90 per cent of a scheme member's benefits if they’re not retired when they are transferred into the PPF, and 100 per cent if they're receiving a pension.
Mr Percival said the issue came to a head because of the British Steel pension scandal.
“In the case of [British Steel Pension Scheme] BSPS, the general view amongst steelworkers was that the PPF was to be avoided at all costs whereas it provides a good safety net and, for some steelworkers, was the best option.”
Around 130,000 steelworkers had to make a choice last year it they wanted to move their DB pension pots to a new scheme being created, BSPS II, stay in the current fund, set to be moved into the Pension Protection Fund (PPF), or transfer out.
FTAdviser reported in November that several steelworkers appeared to be transferring out their pensions after being lured by cheap deals by unregulated introducer firm Celtic Wealth Management & Financial Planning, which then referred the clients to advice firm Active Wealth.
The firm, the first one to be stripped of its transfer permissions, has since entered into liquidation.
The old scheme entered into PPF assessment on 29 March, with around 25,000 members going to the pensions lifeboat – either by choice or by default.
Since March 2017 and until the beginning of February, the scheme has processed 2,600 pension transfers equating to a total value of £1.1bn, according to data revealed by the scheme trustees.
A spokesperson at the PPF said: “The PPF provides a valuable safety net for members of DB pension schemes.
“Ensuring that the full value of that protection is understood when members are advised about their benefits is vital.
“Given the both good and bad practice we have seen in the sector, we therefore welcome this FCA policy paper, particularly the higher level of expected knowledge about the protections we provide.”
Pension transfer specialists are already expected to know key basic information about the pensions lifeboat.
According to Mr Percival, the reference made by the FCA to ‘specialist knowledge’ is related to the depth of this knowledge.
He said: “It may be reasonable for an adviser not to know the detail about the funding levels, etc.
“Similarly, an adviser should understand the basics about, say, the scheme deficit/surplus but would not necessarily know or have the skills to understand fully the employer’s financial position and the strength of the employer’s covenant.”
The reference made by the FCA to specialist knowledge also applies to situations when advisers refer the Financial Services Compensation Scheme (FSCS), scheme funding or employer covenants.
Alistair Cunningham, financial planning director at Wingate Financial Planning, argued that “it's not commonly understood by laypeople the protections their defined benefit pensions have”.
He said: “With scheme failures given undue attention, it is important any adviser explains the risk of loss in a defined benefit scheme is low, and that there are important safeguards.
“For most people a transfer out guarantees an unquantifiable reduction in their benefits, with these safety nets providing a far more quantifiable underpin to the valuable defined benefits.”
maria.espadinha@ft.com
