Estimated reading time: 5 minutes
1 October 2020 heralded the introduction of significant changes to the rules and guidance surrounding Defined Benefit (DB) occupational pension scheme transfers.
The multitude of regulatory changes introduced by the Financial Conduct Authority (FCA) have largely arisen from their increased scrutiny and oversight of the pension transfer advice market, in the wake of the British Steel transfer debacle three years ago.
In addition, adviser firms holding the relevant pension transfer permissions are facing additional challenges; especially soaring Professional Indemnity Insurance (PII) premiums, increasingly combined with prescriptive restrictions relating to the volume and/or types of transfer business they are allowed to undertake.
How is DB transfer advice being affected?
What is the impact of this ‘cocktail of changes’? Primarily, it’s a notable reduction in the number of advisers who are both willing and financially able to carry on providing DB pension transfer advice.
As a result, individuals who are genuinely seeking this type of advice are finding it increasingly difficult to source an adviser, and then to be able to afford the cost of receiving that advice.
Understanding the changes
The changes introduced from 1 October include the following;
- A ban on ‘contingent charging’ for advice on pension transfers and conversions. Contingent charging is where the client only pays for the advice if the transfer goes ahead, which the FCA argues creates a ‘conflict of interest’ for the adviser;
- The introduction of an ‘abridged advice’ service, which aims to filter out those clients for whom a transfer is unlikely to be suitable, before they pay for full advice;
- Advisers must demonstrate why the type of pension arrangement they recommend is more suitable than the charge-capped default investment fund in the client’s workplace pension scheme (where one is available);
- The need to provide a one-page summary with the suitability report and ensure that clients understand the recommendations they are signing up to; and
- The introduction of continuing professional development (CPD) requirements for pension transfer specialists, including 15 hours each year specifically on pension transfers, in addition to any other CPD that they do as a financial adviser.
FCA examination of the DB transfer market
In addition, a lengthy and sustained examination of the DB pension transfer marketplace by the FCA, punctuated by a number of sizeable data requests, has both accompanied these changes and, in certain cases, precipitated them.
Last month, the FCA sent out a data request on DB pension transfer advice, covering the months affected by the coronavirus pandemic. The survey was issued to the 1,653 advice firms who currently hold the relevant permissions, asking them about their transfer business during April 2020 to September 2020.
This is the second data request this year; the previous one being sent to 1,965 firms in July, covering the period October 2018 to March 2020. Their first market-wide survey was issued to over 3,000 firms in 2018, examining the level of DB pension transfer advice being offered between April 2015 (when the ‘pension freedoms’ commenced) and September 2018.
The regulator published the results of that survey in June 2019. It concluded that too much of the advice on DB transfers was "…not of an acceptable standard".
So what is the FCA looking for?
The FCA was concerned that firms were recommending that large numbers of individuals transfer out of their DB pension schemes, despite its overarching stance that such transfers are likely to be unsuitable for most clients. Its supervisory work increased in this area, and a number of firms had their DB transfer permissions removed.
Then, when the FCA issued their Policy Statement this summer outlining the forthcoming changes, it revealed that over 700 advice firms had relinquished their DB transfer permissions, following intervention from the regulator.
Subsequently, the incidence of organisations electing to give up their DB transfer permissions – which include some high-profile names - has continued. Could it be that this a trend that the FCA not only supports, but is actively promoting?
Their latest survey asks two questions about transfer activity and transfer permissions.
The first question asks firms if they provided advice to retail clients on converting or transferring from DB schemes between 1 April 2020 and 30 September.
Where firms have not used their permissions, the FCA then “invites” firms to consider removing the regulated activity of advising on transfers.
In response, Mark Meldon from Meldon and Co (a firm of advisers) stated the below.
". . . were the FCA to arbitrarily remove DB transfer permissions for firms like mine, I would no longer be able to offer a proper service to my pension clients – hardly treating customers fairly . . . While I fully agree that it is rarely in a member’s best interest to transfer a DB pension, there are circumstances, primarily concerning ill-health, where a transfer can be advantageous."
The need to access DB pension transfer advice
Improvements in the quality of advice within the DB pension transfer marketplace may potentially be at the expense of a sustained reduction in supply; arguably arising from a ‘perfect storm’ of changing rules, new restrictions and the cost of PII.
It is vital that access to DB pension transfer advice is maintained, and that those individuals who genuinely need that advice have confidence in the quality and impartiality of the advice and recommendations they receive.
If not, the day may come when the last remaining pension transfer specialist is asked to "turn out the lights" before they leave.
Barnett Waddingham does not provide DB pension transfer advice. If you are considering the transfer of a DB pension, the Personal Finance Society offer a free 'Find an Adviser' service, which sources suitably-qualified regulated advisers within close proximity to your home address.
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