FCA raises concerns over pension transfer incentives

The regulator recently completed a survey of life insurers’ pension provision with a focus on transfer processes. The research covered 18 insurance companies and almost one million transfer requests.

In its report on the findings, the FCA stated: “We are concerned that some consumers may be deciding to transfer based only on the prospect of immediate or near-term reward, such as cashback on signing up to a consolidation service, and so may not be considering the full financial implications of their decision.

“Our review showed that firms in our sample shared this view. We recognise the efforts firms already make to flag up to customers the often valuable benefits of their existing scheme.”

The warning reflects similar concerns raised by pension providers including The People’s Pension. The defined contribution master trust’s chief executive Patrick Heath-Lay has previously called for transfer incentives to be banned to protect consumers.

“Many consumers will be unaware of the benefits their existing pension arrangements may have, and that by transferring [they] automatically give these up.”

Jon Greer, Quilter

Jon Greer, head of retirement policy at Quilter, said: “Some pension consolidators and a handful of direct-to-consumer platforms regularly offer cashback depending on the value of the pension that you transfer, and for many this could be a very tempting offer.

“However, many consumers will be unaware of the benefits their existing pension arrangements may have, and that by transferring [they] automatically give these up. This can include a higher tax-free lump sum or the earliest age you can access benefits – it all depends on the terms of the scheme.

“The FCA suggests that firms are rightly doing what they can to provide that information to a customer looking to transfer, but given where pension engagement is in this country, it is an uphill battle.

“The upcoming pensions dashboard is going to provide a lot more visibility to people of their various pensions, and thus there could be increased demand for consolidation services.”

How long does it take to transfer a pension?

The FCA’s research covered group personal pension arrangements, stakeholder pensions, and other defined contribution pensions offered by life insurers.

It explored the average time taken for an individual to transfer their pension from one of these life insurers. Data was split into transfers that required no additional checks by the provider, and those that required more information to be provided or that received an amber or red flag.

“Our findings suggest that firms are well-intentioned and seek to ensure consumers receive good outcomes when transferring their pensions,” the FCA said. “They also show that ceding schemes made most transfer payments within a suitable time of receiving the request to transfer. We found that more than three-quarters of the firms in our sample completed all transfer requests, on average, within 20 days.”

The majority (87%) of transfers were processed by firms that told the FCA they processed all transfers within 15 days. Without additional checks being required, three-quarters of firms completed transfers within 10 days, and sometimes as little as five days.

However, when additional checks were required, the time it took to complete a transfer ranged from 26 days to as long as 160 days. Roughly half of insurers took between 41 days and 80 days to complete a transfer.

Typically, the FCA found that digital processes were much quicker than paper-based transfer requests.

The regulator highlighted that providers should “avoid causing foreseeable harm from poor or slow service”. It also acknowledged that some “positive friction” in processes could be needed to ensure that consumers were fully informed about what they were giving up when transferring, and to allow providers to check that consumers were not being scammed.

The FCA found that amber flags, requiring additional checks, were applied to less than 2% of all transfers, while less than 1% of transfers were blocked.

Some providers taking ‘significantly longer’ on transfers

Pension consolidator PensionBee recently launched a petition calling for a legally enforceable 10-day pension switch guarantee, arguing that systemic delays were undermining consumer confidence and damaging retirement outcomes.

Responding to the FCA’s report today (15 August), Lisa Picardo, chief business officer at PensionBee, said: “Making transfers quick, transparent and secure is therefore vital to a healthy pensions market, and essential ahead of the launch of the pensions dashboard.”

Picardo added that “opaque and jargon-filled” documents relating to transfers “directly undermine” the principles of Consumer Duty, introduced by the FCA to improve the treatment of customers by financial services firms.

“Ultimately, consumers rightly expect their pensions to be as accessible and responsive as any other aspect of their financial lives,” Picardo said.

While the regulator does not set a specific expectation on timelines for pension transfers, it acknowledged that some providers were taking ”significantly longer” than others to complete transfers.

Some insurers told the FCA that recent increases in activity were stretching their resources. This included bulk transfer requests from pension consolidators.

However, the regulator said it expected firms to ensure they had adequate resources to process transfers and support customers. Pensions dashboards are expected to further increase demand for transfers, the FCA added, meaning that firms should ensure they can respond to “foreseeable spikes in demand”.