Last year was a busy time for those advising on pension transfers, particularly on safeguarded benefits. As a result of the pension freedoms, low gilt yields/high transfer values and high profile scheme failures, there was a significant increase in client interest and activity.
In terms of regulation, in January 2017 the Financial Conduct Authority (FCA) published a short, sharp alert on what it expected to see from advisers, followed in June by the start of a formal three-month consultation period under the banner of CP17/16 Advising on Pension Transfers.
This was justified by a summary of the regulator’s findings following research into pension transfer practices over the preceding two years.
The FCA’s research findings
Interestingly, the research revealed that since the start of 2016, 32 firms had chosen to stop providing advice or to limit their pension transfer activity. Since then, more have stopped offering this service.
This has resulted in increasing transfer fees by pension transfer specialists and an inadequate supply of advice.
Out of the 88 defined benefit transfers that they reviewed, the regulator concluded that in just 47% of cases the advice given was considered suitable and in only 35% of cases the products and funds chosen met the appropriate standards.
The proportion of suitable cases was much lower than they had found in the wider advisory market for pensions advice, where 90% of pensions accumulation advice and 91% of retirement income advice was suitable.
The consultation – main themes
Presumption of unsuitability: The FCA’s proposal to remove the presumption that a pension transfer will always be unsuitable was initially reported by many as a sea change.
After further consideration there appears to be little material change as, of course, the adviser needs to demonstrate that the transfer is in the best interests of the client.
This is detailed in Section 3.11 of CP17/16 Advising on Pension Transfers: ‘An assessment of suitability should focus on whether a transaction is right for the individual and should be assessed on a case by case basis from a neutral starting position.’
Personal recommendation: The FCA proposes that pension transfer advice must be presented in the form of a personal recommendation. It states: “For advice to be meaningful, it is important it looks at the consumer’s individual circumstances and provides a specific recommendation.” (Section 3.7 of CP17/16)
While the FCA acknowledges that personal recommendations are now given in the majority of cases, this is more exacting when meeting the needs of clients living overseas. They often have more complex circumstances and unknown futures, and advice they receive must take account of their unique needs as well as their aspirations.
Appropriate pension transfer analysis (Apta): Transfer analysis is important to ensure that advice does not simply revolve around what is being given up, but also what can be safely afforded in its place.
Again, this could significantly increase the work advisers need to do relating to both an international client’s personal circumstances and chosen place of retirement. This is because the consequences of taxation have now also become a key consideration when crystallising benefits and accessing funds, as well as upon death.
It is now proposed Apta includes a transfer value comparator (TVC) in place of a critical yield. This is to help clients quantitatively compare the transfer value with the amount the client would need to buy a guaranteed income on the open market, at the same level as provided by the defined benefit scheme.
Clarifying the role of the pension transfer specialist (PTS): The FCA has provided some welcome clarification on the role of the PTS stating: “Advice on pension transfers, pension conversions and pension opt-outs must be given or checked by a PTS, who must be a fit and proper person with specific qualifications.” (Section 3.15 of CP17/16)
The consultation proposes guidance that checking of advice by a PTS means assessing the reasonableness of the personal recommendation reached by the adviser. Responsibility for advice where pension transfer advice is outsourced will be considered, including the need for any investment qualification.
The overseas element
Those active in the offshore market will recall that in 2016 the FCA’s Q4 consultation considered overseas pension transfers and the advice requirement. It fully acknowledged the difficulty in regulating it and providing consumer protection, while allowing individuals to consider their options without incremental cost or burden.
While this seemed to have been put on hold, CP17/16 resurrected the dilemma, and promises output from the Department for Work and Pensions.
Finally, the investment content following transfer continues to come under the spotlight, with certain investment practices falling under the headline of ‘pension scams’, and a meaningful increase in the number of complaints to the FSCS.
The FCA paper builds on guidance from January 2017 that said the regulator was “aware some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested”.
It includes the suggestion that those involved in transfer advice will potentially be required to hold the permission to advise on investments, although it is very clear already that far-sighted businesses are outsourcing this area.
In the short term, the squeeze on pension transfer specialist capacity through regulatory scrutiny – at the same time that demand has spiked – is likely to continue, while further increases in costs are also inevitable.
For those clients with limited transfer values this might be prohibitive, whereas others with a more substantial cash-equivalent transfer value might find a higher-quality, more logical and detailed recommendation will help them in making an informed choice.
In the meantime, overseas advisers may need to up-skill in order for UK pension transfer specialists to be prepared to work alongside them.
The proposals and consultation should bring clarity to the advice process, in terms of what needs to be done and who does it. The emphasis on personal recommendation is important, but it is to be hoped that advisers are already taking this approach.
Understandably, the FCA’s final policy statement cannot come quickly enough.
