The rise of DB Pension Transfers

Tue 29 May 2018

A ‘suitable’ case for review

The FCA is casting a net over defined benefit (DB) transfers advice. Anthea Coulter, Account Director at Equiniti Hazell Carr, looks at the steps businesses can take to prepare themselves for increased scrutiny.


No one in the pensions industry can be certain on which side of the argument the Financial Conduct Authority (FCA) will fall when it completes the latest round of consultation into the rules governing advice on defined benefit (DB) scheme transfers.

Responses to a probing FCA survey were due by 25 May and a policy statement is expected in the autumn.

Anyone with pensions review project experience knows that in almost all cases, customers would not have lost future pension benefits had they remained in their DB Pension Scheme.  

With the FCA looking into the rise of DB Transfers, it is already clear that a review of the advice is pending.  Guidance and rule changes were issued by the FCA at the end of March and the regulator is now ramping up its examination of the advisory practises that have already clouded the reputation of some firms.

An extract from Improving the quality of pension transfer advice, the latest consultation document published by the FCA, confirms that ‘suitability’ of advisers and their advice remains at the heart of its approach to protecting consumers and their pensions. It states:

‘We will measure a successful outcome by more pension transfer advice being assessed as suitable. We also hope to see firms improve their record keeping so that more of them can demonstrate suitability.’

With FCA visits to selected IFAs and a programme announced by Director of Supervision, Megan Butler, designed to “build a national picture” by collecting data from all regulated firms that hold pension transfer permission, now is the time to act.

Given the results from the initial FCA review into advice, the prospects of achieving a clean bill of health are doubtful. The review found that fewer than half the case files (47%) demonstrated that transfer from a DB to a Defined Contribution scheme could be regarded as suitable. Only 35% of the products and funds recommended for the new scheme were considered suitable.

And while investment advice was generally considered to be satisfactory in 9 out of 10 cases, this dropped to half (51%) in advice given to members of the British Steel pension scheme.

The FCA action comes amid an increasingly febrile atmosphere surrounding DB transfers. Fears among members that more schemes will end up in the Pension Protection Fund is making some feel they must switch to protect what they have. Transfer values are high, creating the temptation to ‘cash out’ and employers are looking to limit their exposure in the long-term and reduce costs.

One forecast is that a million people will transfer out of their DB scheme in the next 25 years and the number of schemes will reduce to around 1,000, a four-fold drop in the number of schemes today.

Antheanew Anthea Coulter

With such high volumes of business out there and customers seeing £ signs flash before them, how do you advise the customer to make the right choices?

An independent review of client files, past and present, is a good place to start in readiness for closer scrutiny by the FCA. IFAs that can demonstrate they have been proactive in examining each aspect of the process and the actions of advisers will be in a better position to manage any future investigation.

Many firms have checked 100% of DB Transfer Advice cases, so how as an industry do we still fail our customers, as the FCA found in its review of past cases?

Regular sampling can help control processes and provide the proof to the FCA that good housekeeping and thoroughness underpin the firm’s approach to clients.  Documenting how the advice meets the client’s future objectives is a great place to start.

The FCA’s new rules will be particular areas to re-examine. ‘Personal recommendation’ must run throughout the client advice, for example. Analysis of the transfer value must use the Transfer Value Comparator (TVC) to fully explain benefits being given up. Proper account should be taken for the provision for a spouse and dependants. In the past, too many advisers have relied on the critical yield analysis without fully considering why a transfer would meet the customer’s needs and their future objectives.

The advent of pension freedoms, combined with high transfer values has led to changes in customer behaviour, as the FCA found through its non-advised drawdown review published in March. Ensuring customers receive the right advice is therefore even more challenging in the current retirement landscape.

Equiniti Hazell Carr has 20 years experience in managing and reviewing complex pensions cases. To discuss this further, call us on 0118 951 3971.