Pension transfer advice

‘Pension freedom’ reforms were introduced in April 2015 to give people aged 55 and over more flexibility about when and how to draw their defined contribution (DC) pension savings.

They were not aimed at people with defined benefit (DB) pensions, for whom staying in their scheme was likely to be in their best interest. This is because a DB scheme provides index-linked benefits based on salary and length of service, whereas in a DC scheme your future pension income cannot be predicted with much certainty.

At the time, the Government realised that the pension freedoms could encourage more defined benefit (DB) scheme members to transfer their pensions into a DC scheme. It therefore introduced a mandatory financial advice requirement for those wishing to transfer or convert a DB pension with a transfer value worth more than £30,000 into a DC pension.

The number of transfers from DB into DC pensions has risen steadily since the introduction of pension freedoms. Many of these transfers are unlikely to have been in the best interests of those that have these pensions.

The Financial Conduct Authority’s (FCA) supervisory work in this area dates from 1 October 2015 and resulted in some firms exiting the pension transfer advice market (FCA letter to Frank Field, January 2018).

In July 2019, it reported the results of targeted work in this area. It had found advice to be suitable in fewer than 50% of cases. It said this was not acceptable and standards must be improved.” Despite its guidance that advisers should start from a position of assuming that a transfer will not be suitable unless they can demonstrate a transfer would be in a consumers best interests, almost seven in ten (69%) of those advising on a transfer between April 2015 and September 2018 recommended a transfer (DB pension transfers: market wide data results, FCA, July 2019).

On 21 January 2020, the FCA said too much advice was still not of an acceptable standard and that it would step up its supervisory activities in this area. In February 2020, it said “unsuitable DB to DC transfers remained a significant source of harm” and could “collectively, result in losses of up to £20 billion of guarantees over five years.”(Sector views 2020). Its 2020/21 Business Plan commits to continuing to assess the suitability of DB to DC transfer advice.

The FCA published new guidance for pension transfer advisers on 7 April 2020, setting out what it expects during the COVID19 crisis.

On 5 June 2020, the FCA gave an update on its supervisory work in this area. It found that there had been an improvement in the suitability of advice given over time - rising from a low point of 47% in previous years to 60% in 2018. However, it remained concerned at the number of files which either appeared to be unsuitable or where there were information gaps. The number of firms where advice appeared unsuitable was 17% and this remained unacceptably high.

The FCA announced the introduction of a ban on ‘contingent charging’ (where the adviser gets paid if the individual proceeds to transfer) from October 2020 (FCA, PS20/06). Its supervisory work had already resulted in firms withdrawing from the DB transfer advice market (DB transfers – further update on our work, June 2020). To assist consumers with concerns about the advice they had received, it issued an ‘advice checker.’ There is also new guidance for those considering a DB pension transfer, including pension transfer advice – what to expect.

Where a DB transfer has been made on the basis of unsuitable advice, the individual may be able to make a complaint and, if upheld, get redress to put them, as far as possible, back into the position they would have been in if they had not received the advice.

To get redress consumers must first complain to the firm that gave the advice. If the individual is not satisfied with the firm’s response or the firm has not responded, they can complain to the Financial Ombudsman Service (FOS). If the firm that gave the advice is insolvent and cannot pay compensation, a claim can be made instead to the Financial Services Compensation Scheme (FSCS).

Both the FOS and the FSCS have reported rising levels of pension complaints. Financial advice firms have expressed concerns about the consequent rising costs of the levy and professional indemnity insurance.

Some have speculated that there might have been a “multibillion-pound mis-selling scandal” related to this financial advice. The extent of any problem might only come to light in the event of an economic downturn, when the implications of a decision to switch to a DC pension might become clearer to members.

The pension mis-selling review of the mid-1990s is discussed in Library Briefing Paper Pension mis-selling review (CBP 429, July 2020).