The UK financial services regulator has proposed steps to prevent a new pensions mis-selling scandal and protect savers tempted to cash in their retirement savings.
On Wednesday, the Financial Conduct Authority published proposals to improve pension transfer advice and provide more protection for those before retirement considering giving up a “defined benefit” pension, which pays a guaranteed income calculated on salary and length of service.
However, it also proposed dropping guidance that financial advisers “should start from the assumption” that transferring money out of a DB pension will be unsuitable
Over the past two years, the number of people swapping defined benefit pensions for a cash lump sum has risen dramatically because of record high transfer offers from DB pension scheme owners.
Defined benefit pensions are considered generous because they guarantee an income for life. Typically it is index-linked and often based on salary at retirement.
Over the past year, about 80,000 transfers have been made — savers have been tempted by six-figure capital sums of up to 40 times their expected pension income, almost twice the level of two years ago in some cases.
The FCA proposes that financial advisers are obliged to make a more comprehensive assessment — in the form of a “personal recommendation” — to clients who want to cash in their DB pension.
The adviser will have to consider a client’s wider personal circumstances and financial outgoings before making a recommendation. The FCA estimated this would add about £1,625 to an advice bill.
“The cases we have seen where advice is given without a personal recommendation have often been associated with high risk transactions and scam activity,” said the FCA, which estimated that 5 per cent of 80,000-100,000 transfers a year are made without a personal recommendation.
In addition, the regulator is also proposing to ditch guidance that advisers compare a transfer against an annuity — a guaranteed pension income from an insurance company. Instead advisers will be asked to consider a wider set of investments. The annuity market has shrunk since pension reforms in 2015 opened up other options.
“We recognise that the environment has changed significantly,” said the FCA.
The FCA said it still believes that keeping a “safeguarded” pension, which includes DB pensions and other arrangements that offer a guaranteed pension, will be in the best interests of most consumers.
However, the pension reforms meant that for some people a transfer “may now be suitable when it wasn’t previously”.
“We therefore propose to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable,” said the FCA.
Instead the adviser should start from a “neutral” position and assess suitability case-by-case.
This month, Intelligent Pensions, an advisory company based in Glasgow, suspended its transfer business on agreement with the FCA.
The FCA did not comment on ongoing supervisory work on mis-selling concerns in its consultation published on Wednesday, but a former FCA official, Rory Percival, this week estimated the regulator was investigating 50-100 firms.
“The FCA is right to look at current advice on pension transfers, as the current process is complex and may still result in poor outcomes for consumers,” said the Association of British Insurers.
The FCA’s consultation closes on September 21 with rules expected to be published in early 2018.