More to be done by FCA on DB pension transfers

Piecing together the various requests for information from the regulator, what is clear is there was a significant jump in the number of pension transfers between the 2016-17 tax year and 2017-18, where there were roughly 65,600 and 104,000 transfers, respectively.

What the headline figure will be in the 2018-19 tax year is anyone’s guess, but I can easily see it increasing again. This is clearly a concern for the FCA; it spent a lot of time last year trying to ensure the advice that members of DB schemes are receiving is both suitable and of good quality.

At the start of 2018, the watchdog published its expectations with regards to advising on pension transfers. This was particularly important because of the emphasis on the need to consider the investments into which the transfer would be made. 

In some cases, advisers had been conducting pension transfers without consideration to the overall investment plan once the transfer had taken place. The FCA emphasised that generic assumptions should not be used, and made it clear this was a simple reiteration of its expectations: the rule should have already been part of the advice process.

Best practice 

In addition, the watchdog made it very clear that just using critical yield as a guide to the suitability of a pension transfer – as well as having a set rate that determines if a transfer is feasible – is unacceptable. 

The document went on to detail other areas of concern, such as whose responsibility the advice is in circumstances where clients are shared between firms with pension transfer permissions and those without. This again referred to the need to provide advice on the underlying assets as part of the main transfer advice.

The other issue raised in the first communication of the year was that of insistent clients, who can cause advisers and providers a significant headache. Many providers do not want to deal with these clients because they believe that any complaint in future would fall on them. 

Many advisers have their own concerns about insistent clients: first, because they feel strongly the advice they are giving is correct, and second because it can be difficult to find a provider to accept the transfer. The latter issue causes further problems, because the adviser is unlikely to be able to recommend their usual and trusted provider for the transfer, causing more work and requiring increased due diligence.

Policy pronouncements

The next thing we saw in 2018 was the policy statement ‘PS18/6: Advising on pension transfers’, published in March and following on from a 2017 consultation. The biggest shock from this statement was confirmation the starting point for any advice should remain that a transfer is unsuitable. This has long been a point of debate and the consultation had suggested it be moved to a neutral starting point. 

Given that the benefits in a DB pension scheme are seen as better and more valuable to most members than those of a defined contribution scheme, this could make sense. However, considering the fact that advisers should always give clients advice that is most suitable to their individual circumstances, it would seem to be an unnecessary statement.

Most of the other issues raised in the consultation went through essentially as proposed. They included:

• Requiring all advice on pension transfers to be a personal recommendation.
• Clarifying the role of a pension transfer specialist when checking advice written by another adviser.
• Replacing the current transfer value analysis requirement with an obligation to undertake an appropriate pension transfer analysis of the client’s options, and a prescribed transfer value comparator comparing the value of the benefits being given up and the cost of purchasing the same income in a DC pension scheme. 
• Applying a consistent approach for pension opt-outs where there are potential safeguarded benefits.

Very little of these issues was new to those already giving good advice to their clients, apart from the change from the transfer value analysis service to the Apta and the new TVC. Both changes were designed to make it easier for the client to understand the advice being given and increase the clarity of the personal recommendation.

The Apta is less prescriptive, allowing advisers to include details that are more relevant to their clients and only include a critical yield if it is deemed helpful. There are some additional requirements included, such as the need to take account of taxes on the benefits and the impact on state benefits in relation to the transfer. 

Furthermore, it requires advisers to consider trade-offs in greater detail, as well as the impact of pension protection schemes such as the Financial Services Compensation Scheme and the Pension Protection Fund should either scheme fail.

The new TVC will be a significant change to the process that we are used to, and is designed to show graphically the cost to provide the same benefits at retirement under the new pension scheme. This still doesn’t get around the issue of the client wanting different benefits at retirement, such as drawdown, but it is thought to be easier to understand than critical yields ever were. We will wait to see if this has any significant impact on the amount of transfers that proceed.

The policy statement in March 2018 led directly on to a further consultation document. Another policy statement, ‘PS18/20: Improving the quality of pension transfer advice’, was then published in October based on the responses received. These included:

• Raising qualification levels for pension transfer specialists to require them to obtain the same qualification as an investment adviser in addition to PTS qualifications.
• Guidance to clarify that advisers should not just focus on attitude to investment risk, but also explore general attitudes to the risks associated with a transfer.
• Guidance to illustrate appropriate ‘triage’ services on pension transfers.
• A requirement for firms to provide a suitability report regardless of the outcome of advice.
• Updating the various assumptions on inflationary pension increases.

Again, there was little change in the proposals that were put forward in the consultation, except for further clarification with regards to the triage services that can be offered. The concern with these services was that it is easy to stray into the area of advice. 

Triage services must only give generic information about pension transfers and can’t take account of any personal circumstances. Should personal circumstances be taken account of, then advice is deemed to have been given. Hence a suitability report would be required even in the cases where a transfer didn’t take place, however early on in the conversation this decision was made. This is something that is likely to limit the type of conversations that advisers can and will be willing to have with potential clients, partly due to the cost of providing a suitability report.

Where are we now?

The FCA has recently published updated findings with regards to its investigations conducted with firms providing pension transfer advice. These investigations extended to a further 45 firms and visits to 18 of these companies. These 18 firms gave advice to 48,248 clients about their DB pension schemes, which resulted in 24,919 pension transfers since April 2015. Following this, some of the providers varied their permissions and ceased giving advice in this area, although they were a minority of the sample. The regulator reviewed 154 transfers in detail, and the outcomes are shown in Chart 1. 

Previous reviews of a similar nature saw more transfers that were clearly unsuitable and fewer that were unclear, with no material change in the amount deemed suitable. But what we can take from the latest review is unclear, as we do not know how the firms were targeted. 

It is clear that the FCA is still not comfortable with much of the advice being given in this area, so we expect to continue to see scrutiny of the market and the professionals providing advice. Persistently high transfer values will mean the appeal of transfers isn’t going to go anywhere soon, so they will stay high on the regulator’s radar for the foreseeable future. 

What we don’t want to see is the return of the assumption that all pension transfers are unsuitable, as the majority of advisers are doing great work in this area helping their clients to make the right decisions.

Claire Trott is head of pensions strategy at St James’s Place Group