Pension transfers – ensuring advice is fit for purpose
Last week, we proposed changes to our rules and guidance that apply when advising on pension transfers. Transfers from defined benefit schemes to defined contribution schemes continue to be a hot topic with extensive media coverage in recent months. There have also been a number of developments in this market.
Firstly, the introduction of the pension freedoms two years ago has changed the environment and we now have a clearer picture of how people are taking their pension savings as cash or income.
Rather than advice starting from a presumption that a transfer would be unsuitable, an adviser will need to instead demonstrate that the transfer is in the best interests of the client
Secondly, we have seen the financial backdrop changing quite significantly. Transfer values are at historically high levels due to record low gilt yields.
There have also been developments at the DB schemes themselves, with changes to investment strategies resulting in moves into gilts to match liabilities of maturing schemes.
As transfer values take into account a scheme’s investment strategy, the fall in gilt yields (and therefore higher values) during the past year or so has contributed to higher levels of transfer value amounts. At the same time, many schemes and sponsors are encouraging members to consider all of their retirement options.
These factors, along with the legislative requirement to take advice in many cases, means that demand for transfer advice has surged. Therefore, we feel it is the right time to review our rules to ensure they are fit for purpose. This is also an opportunity to add some further clarity for advisers in this very complex area.
DB pensions and safeguarded benefits are valuable, and many consumers will be best advised to keep them. They generally provide a stable, inflation-proofed income for life.
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Long-term saving is one of the biggest issues facing society today. People are living longer and the pensions landscape seems to be constantly changing, which makes it very difficult to navigate and to know what options work best for individuals.
But we recognise that people may prefer to explore other options. We are therefore proposing that, rather than advice starting from a presumption that a transfer would be unsuitable, an adviser will need to instead demonstrate that the transfer is in the best interests of the client.
We also consider that all transfer advice needs to result in a personal recommendation, relevant for the client’s particular circumstances. While this is already current practice in most cases, our proposals make this a specific requirement. This is such a complex area that looking at generic scenarios is simply not sufficient.
In addition, we are proposing to replace the current transfer value analysis with a comparison showing the value of benefits being given up. The concept of ‘critical yield’ is one that is often hard for consumers to understand, and a numerical analysis is only part of the picture.
Advice should be based on an individual’s overall circumstances, including their income needs throughout retirement and other non-financial factors, such as the client’s risk appetite and their health.
Taken together as a package, these changes should ensure consumers are in a position to make an informed decision based on a personal recommendation, which takes into account their circumstances. Our proposals are out for consultation. This is a complex area and we would very much encourage feedback.
David Geale is director of policy at the Financial Conduct Authority
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