Less than half (47%) of 88 recommended defined benefit (DB) pension scheme transfers advised upon since October 2015 were suitable, according to a review by the Financial Conduct Authority (FCA).
The review, which has been conducted over the past two years in order to update current FCA guidelines, assessed the advice individuals receive from advisory firms regarding transferring their DB pension to a personal pension. The review investigated the potential risk of harm to individuals, the suitability of the advice they were receiving, as well as the FCA’s continued exploration of scams.
Since October 2015, the FCA has reviewed 88 DB transfers where the recommendation was to transfer. It found that 47% of these were suitable, 17% were unsuitable, and a further 36% where it was unclear if a recommendation was suitable.
The review also found that only 35% of the DB transfers had a suitable product and fund recommendation, 24% had recommended unsuitable products and funds, and for 40% the suitability was unclear. This is much lower than the FCA’s other findings regarding the wider advisory market for pensions. For example, its Assessing suitability review, published in May 2017, found that 90% of pensions accumulation advice and 91% of retirement income advice was suitable.
The review also warned of the risks involved when advisory firms introduce individual clients to specialist pension transfer advisory organisations. The FCA stated that due to not sharing information sufficiently between the two advising organisations, individuals could have their pension savings invested in an inappropriate or scam investment as the specialist organisation did not have enough information about the individual’s objectives, needs and circumstances.
The FCA further found instances where one of the advisory organisations made a recommendation without knowing where the transfer proceeds would ultimately be invested, or did not make a recommendation for a receiving scheme or investment. The FCA stated that individuals would not be able to make a fully informed decision without receiving advice that took all of these elements in to consideration.
The review also raised concerns around transfer analysis that was based on default schemes or funds, despite these not being the actual receiving funds, and whether advisory organisations had the resources in place to deal with the increased number of referrals appropriately, with many informing the FCA that they were struggling to process cases within three months of the transfer offer.
As a result of the FCA assessment, four of the 22 organisations analysed no longer advise on DB pension transfers. The review also found that since 2016, 32 organisations have stopped providing advice in this field or have decided to limit pension transfer activity.
The FCA review findings will be used to direct a response to its consultation paper Advising on pension transfer, which was launched in June 2017. Furthermore, the FCA plans to carry out a further phase of supervisory assessments starting in the current business year.
Steven Cameron, pensions director at Aegon, said: “The FCA update on its review of DB transfer advice suitability provides helpful insight into where [its] concerns around previous practices lie. Advisers can now review this alongside the proposals for future DB transfer advice set out in the FCA recent consultation. Both of these FCA publications highlight the importance of considering the customer’s needs as well as objectives and of taking into account the recommended receiving scheme and investment approach based on the client’s attitude to risk. This clarity will allow advisers and transfer specialists to review their approach, including how they share information to ensure they are meeting FCA expectations. This should then allow advisers and specialists to work together with confidence to begin to meet the huge pent up demand from customers.”
Tom McPhail, head of policy at Hargreaves Lansdown, added: “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 policy makers in government and in the FCA.”