Since October 2015, the FCA has reviewed 88 DB transfers where a recommendation was made to move the money out. The review was conducted to determine how companies had changed their business models to adapt to changes in legislation, particularly the pension freedoms.
The regulator found that “some firms are not giving enough attention to customer outcomes when changing their business models in the wake of the pension reforms”.
Unsuitable recommendations
Of the 88 schemes reviewed by the FCA, 17% were found to have been unsuitable, while in 36% of the cases assessed it was not clear if the recommendation was suitable or not.
Just 47% of the recommendations given to transfer DB pensions were deemed, by the UK financial regulator, to be suitable.
And it was not just the recommendations to transfer that were found to be lacking, the products and funds recommended to clients were also criticised.
- 35% were suitable
- 24% were unsuitable
- 40% were unclear
Suitability gap
The FCA said that many firms had designed processes and procedures that make it difficult for them to establish whether or not the advice was suitable.
This included firms:
- Failing to obtain enough information about clients’ needs and personal circumstances.
- Failing to consider the needs of the client alongside the client’s objectives when making a recommendation.
- Not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits.
In some cases, advisers failed to make appropriate comparisons between the DB scheme and the intended receiving scheme, meaning the advice was based on incorrect or inaccurate comparisons.
Tom McPhail, head of policy at Hargreaves Lansdown, said: “Taken in conjunction with evidence of a rapid decline in demand for annuities, we are concerned about pension investors’ increasing dependence on non-guaranteed pensions for their retirement security. This has important implications for policymakers in government and in the FCA.”
Specialist transfer firms
A large number of firms do not advise on DB transfers and choose instead to introduce clients to firms specialising in this area.
However, some of the specialist firms were found to have made recommendations without considering the receiving scheme/investment or without knowing the adviser’s intentions for investment.
Despite issuing an alert in August 2016 about the general risks associated with firms accepting such introductions, the FCA said some firms have not taken the warning on board.
The primary risks involved a lack of information sharing, specialists conducting transfer analyses using default rather than bespoke investment information, and having insufficient resources to appropriately deal with adviser requests.
Ongoing FCA review
Over the last two years, the FCA has requested detailed information from 22 firms on their DB transfer business, resulting in a review of client files at 13 firms and 12 site visits.
As a result, four firms have chosen to stop advising on DB transfers.
In addition, the FCA has also continued its work on scams, particularly those that target consumers’ pensions. Since the start of 2016, 32 firms have chosen to stop providing advice or have decided to limit their pension transfer activity.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The starting point for anyone with a [DB] pension should be to assume it is best left as it is.
“Transferring means giving up a promised income in return for the uncertainties of investing in the stock market. Transferring away could be investigated further if you are in poor health, are single or have concerns about the employer that provides your pension.
“These types of pension transfer are very complicated and require very specialist advice,” Long said.
