Fewer than half of defined benefit transfer advice processes are “suitable”, according to analysis by the Financial Conduct Authority, raising concerns over the lack of communication between introducing companies and transfer specialists.
The regulator’s toughening stance comes amid sky-high transfer values triggered by low bond yields, and has seen it block a number of companies from advising on DB transfers.
Of 88 DB transfers where the recommendation was to transfer since October 2015, just 47 per cent met the markets watchdog’s expected standards, although only 17 per cent could be confirmed as unsuitable.
There’s much that pension scheme trustees can do to help and I think IFAs can often be frustrated by not getting all the information that they need
Carolyn Saunders, Pinsent Masons
Even fewer of the products recommended during the process were suitable, the FCA said, at just 35 per cent.
The figures contrast sharply with the quality of advice witnessed in the broader advice market; the FCA has previously found that 90 per cent of accumulation advice and 91 per cent of retirement income advice is suitable.
The findings do include companies that have since chosen to stop providing transfer advice over FCA concerns, but it has not conducted any analysis on whether these companies provided the advice that was identified as unsuitable.
An FCA spokesperson declined to comment on whether the regulator would take action over any companies still operating that had provided unsuitable advice.
Vigilance urged against scams
Several key areas were identified as driving the unsuitability of transfer advice. Introducing companies are not providing transfer specialists with enough information about the client’s “objectives, needs and personal circumstances”, the FCA said.
Meanwhile, specialist transfer companies were making recommendations without knowing where the funds would be invested, or assuming a default investment where they knew this would not be the case.
The FCA also found that many specialist transfer companies lacked the resources to cope with the boost in DB transfer business.
Margaret Snowdon, chairman of both the Pensions Administration Standards Association and the Pension Liberation Industry Group, was unsurprised by the findings.
“Suitability has been a key issue for some time,” she said. “The most worrying feature, given the scams risk, is that some advisers fail to consider the actual investments that funds will be in post-transfer.”
Not checking destination investments does not necessarily mean the transfer will be made into a fraudulent scheme.
“We need to be careful we don't scare people off good quality advice,” she said, but added: “We know that unsuitable investments is behind many scams, so relying on generic investments or checking after the event is not good enough.”
Move away from critical yields
The FCA is expected to clarify its guidelines for advising on DB transfers in its response to a consultation launched in June.
The report suggested remedies including replacing the current transfer value analysis with a “requirement to undertake appropriate analysis of the client’s options including a prescribed comparator indicating the value of the benefits being given up”.
Hargreaves Lansdown senior pensions analyst Nathan Long welcomed this move away from the critical yield analysis, on the basis that it can be difficult for consumers to understand.
Given that consumers consistently say they want guaranteed income, he said an adviser's default position should still be that transferring out DB benefits, which are often effectively a discounted annuity, is unsuitable.
“You have to ask yourself at what point is it worth giving up all of your guaranteed income to get income drawdown?” he said.
Trustees could be more helpful
Carolyn Saunders, head of the pensions and long-term savings team at law firm Pinsent Masons, agreed that the FCA clarifying its guidance around transfers would be helpful to IFAs, who have been faced with an “explosion” in the number of transfer requests in recent years.
“There’s a huge level of awareness amongst the IFA community about these issues and I think they’re feeling under pressure,” she said.
Saunders said she regretted that the FCA consultation had not proposed a consideration of sponsor solvency in the advice process, although she said it would be difficult for IFAs to formally assess.
Report calls for legal right to partial DB transfer
Members of defined benefit pension schemes should have the legal right to partially transfer their pension rights, a new report has said. It also recommended enhanced disclosure and broader consideration of client profiles.
Instead, she suggested that reminding members of the possibility of insolvency might be a responsibility of scheme trustees, a group she also wanted to see providing greater aid to advisers during transfer assessments.
“There’s much that pension scheme trustees can do to help and I think IFAs can often be frustrated by not getting all the information that they need,” said Saunders.
