Yet, the decision to transfer out of a DB scheme is a complex one and the FCA maintains their view that transferring out of a DB scheme is unlikely to be suitable for most people.
EQ look at the impact of these transfers both for the individual pension holders and their advisors.
Each time the FCA undertakes a review into DB pensions transfers, they still find around 50% of cases fail to meet their advice expectations. As firms continue to fail to demonstrate that transferring was suitable, their shortcomings are often related to ‘the basics’. The FCA’s view is that too many consumers are receiving a recommendation to leave their DB scheme.
Here is a quick reminder of the FCA’s basics1 :
- Insufficient fact-finding is carried out to establish the customer’s needs and objectives
- A lack of consideration given to achieving desired retirement goals through retaining the DB pension and exploring how the DC pots could be utilised in the short term until the DB pot reaches normal retirement or exploring taking benefits from the DB pot early.
- Transferring the largest guaranteed pension with few other assets to support retirement
- Greater focus on flexibility, maximising death benefits, achieving early retirement or securing a larger PCLS, rather than on how the DB pension could meet essential income needs.
- Undue emphasis on maximising potential for good investment returns without showing how income might reduce, not keep pace with inflation or not last your lifetime if investments returns were poor or charges were high.
Help (and Pressure) for Businesses
On 15 January 2021, the FCA released their Defined Benefit Advice Assessment Tool (DBAAT)2. This valuable tool allows firms who continue to provide DB Advice to clearly see exactly how much information needs to be gathered to demonstrate suitability of advice and that full disclosure is given to the consumer.
Firms can use the DBAAT to assess the suitability of DB transfer advice and the adequacy of client disclosure they gave before October 2020. This DBAAT does not incorporate the new rules which came into force on 1 October 2020, and an updated version reflecting this will be released shortly.
The FCA have also published the Finalised Guidance GC20/13 which will help firms understand what is expected of them when DB transfer advice is given.
Given these latest standards and the reduction in the number of firms providing DB Pension Transfer Advice, it raises the question of what the FCA is looking to achieve in this area long term. Could the aim be to shrink this market further, or is it to instil greater and more effective self-regulation?
Let’s consider this for a moment: Past business reviews can have a terminal impact on businesses and we’ve already seen several firms fall into the FSCS. No one really wants this outcome as it is bad for both the companies and their customers, as well as the whole market.
More Time = Better Decisions?
With DB pensions, complaint levels are currently low, and customers appear to be generally happy with the advice they were given. Perhaps this could be because they were not fully informed? If alternative ways forward had been discussed, would as many people really of wanted to transfer?
There is often a time pressure to complete the advice process before the transfer value expires. Whilst transfer values are valid for 3 months, in order to complete the analysis there is a large amount of data gathering of scheme information required. It’s rare that a scheme administrator provides all the information requested first time and leads to delays that can’t be avoided.
If the Transfer value was valid for 6 months, this time pressure would be reduced and give the advisor more time to properly consider the information and the consumer more time to think about their decision. It would also help mitigate the need to get new quotes and go through the cycle a second time. Without this time pressure, it would be interesting to consider how many consumers may have thought twice and decided not to proceed? Or is the consumers' desire so great to take advantage of pensions freedoms that this the over-riding reason why so many transfers proceed?
What Does the Future Hold?
Against the backdrop of rising PI Insurance and nervousness about the FCA knocking on your door to check files, there is good reason for advisers to continue to ensure the advice they are giving is in line with the DBAAT and meets the high level of evidence required.
Not all advisers will have the desire, or sufficient depth of DB knowledge, to go into the level of detail needed in order to ensure suitable advice is provided. This will result in a natural shrinking of the market leaving only true specialists providing well thought through advice and fair customer outcomes.
The FCA has some confidence that the standards of advice across the industry are improving; but still remain well below the desired level. For firms wishing to continue to provide this specialist advice, the next steps from the FCA include:
- Engaging with the firms where The FCA assessed advice processes and/or reviewed files. Where firms have not met their standards, The FCA expect the firm to put things right, including carrying out past business reviews and paying redress.
- Issuing a further data request to all firms with the pension transfer permission, which will help to inform where the FCA target future assessments.
We know the industry has for years quality-checked these cases, yet there is still such a high level of unsuitable advice or cases with material information gaps. Whilst self-regulation is an essential ingredient, perhaps firms should seek an independent and objective check of each DB advice case to help maintain standards and address any advice shortcomings before completion of the transfer, to hopefully save firms from future past book reviews?