View more on these topics

Is regulation killing pension freedoms?

Regulation around defined benefit transfers and drawdown must be strong enough to protect consumers but not to the extent it erodes pension freedoms

The FCA has had its work cut out since pension freedoms took effect. Having taken the industry by surprise when announced in 2014, the reforms have thrown up plenty of concerns for the regulator.

It has a number of inter-related issues on its plate, such as misselling risks, access to advice and the lack of consumer awareness around retirement options. Protecting consumers is delicately poised against preserving the freedoms those consumers want to enjoy. Go too far one way and there is a risk of compromising the other.

Some commentators are concerned that this is what is happening in the defined benefit transfer market.

Intense regulatory scrutiny in the light of high transfer values and the unscrupulous advice that characterised the British Steel crisis has led professional indemnity insurers to increase premiums and limit cover for firms involved in DB transfers.

Advisers who were already spooked by worries about complaints are thinking twice about the risks of operating in this market. But without regulated advice, transfers that enable DB scheme members to access pension freedoms cannot proceed. So how does the industry rate the regulator’s response to pension freedoms? Are they slowly being eroded?

‘Goldilocks’ regulation for transfers
“One of the key areas of concern we have seen is the way in which scammers have exploited pension freedoms. They have targeted people who don’t understand the value of DB schemes or where their employers are in distress, such as British Steel,” says Matthew Swynnerton, partner at law firm DLA Piper.

“DB scheme members have a statutory right to transfer out and it is difficult for trustees to stand in the way of that. There has to be a requirement for the delivery of advice for members and checks have to be put in.

“I don’t think regulation has gone too far in terms of protecting members of DB schemes.”

Royal London director of policy Steve Webb says there is a need for a “Goldilocks” level of regulation – not so weak the wrong people transfer and then complain later, and not so strong the market is killed and people for whom a transfer is in their best interests lose out.

However, he fears we are on the road to the latter.

Adviser put into default over DB transfers raises money for appeal

“There is now a real danger that well-meaning actions by the regulator could kill the market completely. For example, the proposal to raise the Financial Ombudsman Service compensation limit seems like an obvious pro-consumer initiative but it now looks as though PI insurers are jacking up premiums in anticipation of the change.

“This will result in perfectly good advisers leaving the market, which is not in the consumer’s long-term interest,” he says.

Adviser view

Sandro Forte
Chief executive, Forte Financial Group

The problem with being overly bureaucratic is that financial services becomes more cumbersome and it is harder to do business. Ease of business is an important consideration for the regulator, but not to the detriment of the consumer. DB transfers is a good case in point. The general principle is not to transfer but there are certain situations where it is good advice.

We shouldn’t have more regulation but better education and licenses for doing these things should be harder to obtain.

There should be regulation in the right areas, with tougher sanctions for people who don’t do the job properly, rather than focusing on the process and regulating that. We don’t want to be critical of the regulator but it needs to do more on the job, such as mystery shopper exercises. It can’t regulate from Canary Wharf.

Drawdown and the advice gap
The problems coming to light after the introduction of pension freedoms are not restricted to the DB transfer market. More consumers have inevitably gone down the drawdown route, but those who did so on a non-advised basis have the potential to make all the wrong decisions that will cost them dearly in the long run. Some may think they do not need advice but, for others, the cost of advice is a big obstacle.

Capco head of retail asset and wealth management Niral Parekh says: “There does seem to be a major gap left after the RDR and now pension freedoms, where the commercial case for the industry focusing on retirement advice solutions for the mass market doesn’t stack up yet – even if there is an urgent need to fix it.”

In the case of non-advised drawdown, the FCA has intervened with a view to providing consumers with better retirement outcomes in the absence of regulated advice – for example, by introducing investment pathways to prevent consumers defaulting into cash.

Claire Trott: The proof of the pension freedoms pudding

PA Consulting pensions expert Mike Teall points to research collated for the FCA’s Financial Advice Market Review which suggested there was a 40 per cent increase in the number of people taking advice in 2018.

“Despite this uptick, there are still people making poor decisions at retirement. Savers keen to dip into their pension pot are often taking all the money out in one go and paying more tax than if they had spread the withdrawals over several years,” he says. “There has to be some kind of backstop for people who are taking tax-free cash and leaving money in drawdown. That money needs to be invested sensibly – and there is a chance that, without advice, people could make the wrong decision.”

Teall regards investment pathways as a helpful mitigation to this and says pension providers are supportive of the idea.

“It gives them the ability to provide simple options for customers that they know the regulator is happy with. But if you are an adviser who wants to look at individual circumstances holistically you are bound to find flaws in this type of process.”

Parekh believes we are heading for “uncharted territory” given the number of pensioners looking to retire will only increase. “They will be faced with no access to advice because of the size of their pension pots; subjected to misselling or suffer from lack of awareness. So, it’s probably the right action for the regulator to look at mitigating those risks in turn,” he says.

Adviser view

James Lindley
Founder, Castell Wealth Management

There is a fine line between consumer protection and pension freedoms, and a common-sense approach should be adopted in reviewing the appropriateness of policy decisions.

I do not feel it is in anybody’s interest to allow complicated pension transfers and drawdown without clients first having access to a trusted advice process.

As an industry, the layers of regulation provide an environment to protect clients and prospective clients. As pension freedoms evolve, it is likely that areas of concern will be legislated against.

In the case of pension freedoms, it seems the regulator and the industry have been caught unprepared, and subsequently have suffered from the unintended consequences of positive government policy change.

Catch-up and refinement
As pension freedoms caught the industry and the regulator by surprise, there is perhaps an argument for saying all the FCA is doing now is playing catch-up. Would establishing a regulatory framework first have struck a better balance between consumer protection and pension freedoms? Selectapension director Peter Bradshaw thinks so.

“When the freedoms were announced, they were a big surprise. Some time later the regulator sampled a small number of client files and judged they didn’t demonstrate the suitability of pension transfer advice,” he says.

“This work and subsequent guidance would have ideally been in place ahead of 2015 to avoid the confusion, lack of confidence and bad press which followed cases like the British Steel pension scheme.”

DB transfers review criticises FCA register and Unbiased

However, Royal London’s Webb does not think pension freedoms should have been delayed while the regulatory prep work was completed. “You only really know how people are going to react to a change in the rules when they come into force, so the regulatory framework was always going to have to evolve,” he says.

Standard Life head of strategy and development Neil Hugh agrees. “This critical period of watching and waiting allowed us to understand the resultant customer behaviours and answer the big question of what next?”

Hugh believes the FCA’s work around pension freedoms is not an act of erosion but rather one of collaborative refinement. “Some may argue that more of this thinking could have been done upfront in preparation for pension freedoms coming into effect, and that we are working backwards to understand what this landscape should look like now,” he says. “Equally, it may always have taken the opportunity to observe the reforms in practice to gain the level of understanding that we have arrived at now.”


Michelle Hoskin: Have you got what it takes to be a leader?

Some of the smartest financial planners struggle to make it as business owners and leaders of teams Running a business in financial services is no walk in the park. There is no amount of technical qualifications that will help you with this one. It does not matter how technically smart you are, it is not […]


Nick Bamford: What does culture really mean for an advice firm?

In a recent column for Money Marketing, Sandringham chief executive Tim Sargisson argued that a business’s culture was more important than titles such as “chartered”. A lot is written about culture within firms but what does it actually mean in practice? I guess there are two perspectives: how the business is perceived by its clients […]

Roger Edwards: Winning the protection long game

I have just celebrated publishing episode 200 of my podcast. When I came up with the idea, most people did not even know what a podcast was. In case you still don’t, it is a radio show you can download and listen to whenever you want. A broadcaster friend of mine at the time warned […]

If it doesn’t consider ESG factors, it isn’t credit analysis

Head of Credit Research, Martin Foden shares his views on the importance of a sustainable approach to fixed income investing, believing that if environmental, social and governance (ESG) factors aren’t considered, it isn’t credit analysis. He also explains why it is vital to understand how ESG can impact different asset classes. Read Martin’s full thoughts […]


News and expert analysis straight to your inbox

Sign up


There are 6 comments at the moment, we would love to hear your opinion too.

  1. BLOHA

    (Bettridge’s Law Of Headlines Applies)

  2. Julian Stevens 7th March 2019 at 9:01 am

    To quote Sandro Forte: There should be regulation in the right areas, with tougher sanctions for people who don’t do the job properly, rather than focusing on the process and regulating that.

    Or, to put it another way, regulation in this area (like all others) should and indeed is supposed to be proportionate and appropriately targeted which, so far, it plainly isn’t.

    Can anyone explain why the FCA refuses even to TRY to regulate thus, starting with what appears to be the single biggest problem area, namely a small number of IFA’s putting clients into totally unsuitable and wildly off-piste investments, almost always without relevant PII cover (on which, extraordinarily, the FCA doesn’t insist) and then defaulting on their liabilities almost as soon as the inevitable slew of complaints starts rolling in? I honestly don’t understand this wilful dereliction of duty.

  3. I can only speak from a personal view…

    Pension freedom is a good thing for the consumer, and I believe over regulation and micro management has made it harder and expensive, it must be said, not only to advise clients on the freedom they have but also across board.

    From a client stance, good sound financial advice comes at a cost and do I want to pay it ?

    From a advisory and business stance, if I advised said client will it be worth all the work, man hours and still make a profit ? (Me-: not for funds under £150,000 and cash in the bank to pay my fee)

    Both then push the poor consumer into seeking back alley shady practitioners, or scammers, or settling for the path of least resistance…. dealing with their existing pension providers, which in itself is not bad but not as good as shopping around.

  4. Advisers should as a Profession refuse to advise on any DB Transfer until some solution can be found and agreed to the current situation.

    The DB Transfer market will be, if not already dead within the next twelve months. No advisers business cannot sustain the PI Costs in the long term, it is that simple.

    For every DB transfer undertaken an advisers business typically will have to pay a yearly £375 plus VAT, per transaction, PI cost for the remaining life of that business. This makes undertaking any DB transfer an annual cost that in the long run cannot be sustained.

    So typically a DB Pension transfer over a 10 year period will cost a minimum of £4,462.50 in PI,for that ONE transaction, this is without taking into account inflation, the inevitable increase in costs and lastly, but most important, the FSCS level being increased, which will send this cost rocketing even higher. I do wonder how many business have not factored this into their business plan. The average firm can only possibly stand two, maybe three upheld complaints due to the high excess, before becoming insolvent.

    If you then factor in the dangers of uncertainty of FOS outcomes, no time limits of liability (no Long Stop) and the inevitable consumer compensation/claims companies, it is impossible to see how any adviser can advise in this area long term.

    PI Insurance are restricting firms to only allow a small number of transfers from each scheme. If another British Steel happened later this year, the Politicians will see very quickly the unintended consequences of using pensions as a football to forward their political careers.

    I have not seen one report, NOT ONE report anywhere, of the fantastic work many advisers did undertake with British Steel members. However, the 0.5% of British Steel pension members who were poorly advised have dominated the headlines, some having signed over their pensions having had FREE Sausage and chips! Headlines driven by individuals that were no where to be seen when they were needed, but have so much to say after the event.

    So, the consumer will be unable to move there DB Scheme, as no advisers will help and maybe this is a good outcome.

  5. The so called pension freedoms were in my view a huge error. I think the Regulator has a not dissimilar view.

    I sincerely believe that those with funds under £750k will come to regret their decisions in years to come. (Yes, there are exceptions – but precious few)

    • Julian Stevens 7th March 2019 at 8:41 pm

      Yes, I agree that the Pensions Freedoms were a huge error, though the freedom for people to transfer the value of the DPB’s to a PP or SIPP has been around for many years, The real problem though, as I see it, is allowing people to encash their pension funds, often without properly considering the long term effect on their retirement income. Drawing their 25% TFC entitlement early, perhaps to pay down debt, is one thing but cashing in the whole lot is likely to be a wholly unsuitable course of action for the vast majority.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm