Defined Benefit  

Pension transfers decline as FCA rules start to take effect

Pension transfers decline as FCA rules start to take effect

The total number of customers advised to transfer out of their defined benefit scheme has fallen between April 2020 and September 2021 by 31 per cent.

A freedom of information request to the Financial Conduct Authority by Kroll revealed that 34,053 people were advised to transfer out of their DB scheme in the 18 months to September 2021.

This compared to 49,456 reported to have been advised to transfer out in the previous 18 months.

Mark Turner, managing director in Kroll’s Financial Services Compliance and Regulation practice, said the number of customers advised to transfer out of their DB pension scheme in 2021 was far lower than in previous periods. 

“Reducing this figure has been a key aim of the FCA, so it’s positive to see that regulatory intervention seems to be working,” he said. 

Crackdown on DB advice

The data showed a decline in transfer recommendations after the FCA moved to crackdown on unsuitable advice in this area and introduced its contingent charging ban

In October 2020, a ban on contingent charging came into effect with a view to remove the conflicts of interest which arise when an adviser only gets paid if a transfer goes ahead.

Only consumers with certain identifiable circumstances, such as those suffering from serious ill-health or experiencing serious financial hardship, are exempt.

At the same time as the ban, the FCA introduced a new form of advice. Abridged advice sits in between triage and full transfer advice but can only result in a recommendation to not transfer out.

It begins with an introductory chat with the client, where the adviser can get some high-level information about their circumstances to then determine that they are not a viable candidate for a transfer.

Last year, data from the FCA, obtained by LCP through an FOI request found more than two in three members who were charged on a contingent basis ended up transferring their defined benefit pension.

The data showed there was a “significant” correlation between the adviser charging structure and the extent to which those who seek DB transfer advice ended up transferring out.

Turner said despite these new rules, the percentage of customers being advised to transfer remains high – close to two thirds.

He said: "This, however, could simply mean that the triage process is working as intended and that customers who previously might have been advised not to transfer are now simply not progressing past the initial guidance phase to receive full advice.”

Turner added that while the initial data looks positive, the potential risk posed by unintended consequences needs to be considered. 

“If more regulatory attention means that advisers withdraw from this market and no longer offer transfer advice, then consumers could start to suffer. 

“If the market shrinks, then customers simply may not be able to get access to high-quality and affordable transfer advice in the future. We may need to wait a little longer to fully grasp the long-term effects.”