FCA gives warning on pension transfer advice

An alert has been issued by the Financial Conduct Authority (FCA) following a discovery regarding pension transfer advice. The regulator found that firms had been advising on pension switches or transfers without considering the nature of consumer investment.

They fear that client recipients of the advice “are at risk of transferring into unsuitable investments or – worse – being scammed”.

The FCA went on to mention its expectations for firms, as well as highlighting the responsibility involved with such an advisory role.

The regulator stated: “We expect a firm advising on a pension transfer from a defined benefit scheme or other scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme. It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.

“Unless the advice has taken into account the likely expected returns of the assets, as well as the associated risks and all costs and charges that will be borne by the client, it is unlikely that the advice will meet our expectations.”

Where pension transfers were concerned, the FCA highlighted the need for firms not to provide generic advice based upon hypothetical schemes with a ‘set’ outcome. Instead, they expressed the need for firms to acknowledge the specifics of the scheme at hand and the likely asset return that the clients’ investment will gather.

The regulator also stated that certain firms had been claiming their ability to advise on pension transfer, but had actually been outsourcing the work. They stressed that this was not acceptable.

The FCA also reiterated the rules regarding overseas schemes, once again advising that firms focus on the relevant scheme which the client has invested in – this could potentially require correspondence with the overseas adviser.

“We acknowledge that non-UK residents considering a pension transfer are likely to need to seek advice from both an overseas adviser for investment advice and a UK adviser for advice on the proposed transfer.

“In order to advise on the merits of the proposed transfer, the UK adviser should take into account the specific receiving scheme, including the likely expected returns of the assets in which their client’s funds will be invested, the associated risks, and all costs and charges that would be borne by their client.

“This means liaising with the overseas adviser where necessary.”

The rules of the FCA continue to apply to advice given in situations where there is no obligation for that advice to be taken.

The regulator concluded by highlighting the need for advice to include the suitability of assets which are to be invested in. This will apply where a firm is recommending a pension scheme, in the knowledge that the client will switch from a current pension plan to an investment through a scheme.

Pensions Director at Aegon, Steven Cameron, commented on the FCA highlighting its expectations. He stated: “We’re pleased the FCA is looking at its expectations around DB to DC transfers. However, we believe a more fundamental review is needed of the ‘TVAS’ approach to fully reflect the freedoms now available to those with DC pensions from age 55. TVAS still assumes people will replace their DB pension with an annuity from the scheme’s retirement age, which is clearly no longer the ‘norm’.

“The FCA is right to highlight the importance of investment strategy after transfer. However, this can’t be framed solely on the basis of ‘will this beat a critical yield’. It also needs to reflect the customer’s intended approach to drawing an income and from what age.

“We note the FCA’s references to taking personal circumstances into account. Attitudes towards the pensions freedoms are a major part of this and we’d welcome an expansion from the FCA on this key point.”


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