Former FCA technical specialist Rory Percival has expressed concern over how advisers approach defined benefit pension transfers.
In a blog post on his website, Percival said that transferring a DB scheme is suitable on many occasions, and compliance officers or advisers often wrongly thought that the FCA would always consider a DB transfer with a very high critical yield to be unsuitable.
However Percival, who was one of the regulator’s advice sector leads up until last month, said that advisers were sometimes using DB transfer as “ticking a box” when the client wants flexibility and death benefits.
He writes: “I have seen many cases where transferring is the right advice, even transfers with outrageously high critical yields can still be suitable for certain clients. And when this is the case, if advisers are going to offer advice, then they must provide suitable advice – to transfer.”
“What I am more worried about, however, is advisers recommending a transfer when this is not suitable advice. You can see the appeal to the client – the ability to have access to a potentially large pension fund in a flexible way which can then be passed on to a spouse or children on the client’s death. We all know about hyperbolic discounting – people valuing money now much more than more money in the future. And the file can be given the sheen of suitability – the client’s objectives for flexible benefits, and assets to pass on to spouse and children at death, can be met by transferring but not by keeping the DB scheme. Objectives met, box ticked.
“But ticking a box doesn’t necessarily mean it’s suitable or in the client’s best interests.”
Percival adds that communication with clients is key to ensuring a DB transfer is really what they need.
“If it was clear to the client they could have a much higher but inflexible income, would they have preferred this? If the DB income was higher even after paying into a whole of life plan to provide the death benefits the client wanted, would they have preferred this? If there was some other way of achieving the client’s objectives whilst retaining the valuable guaranteed DB benefits, would the client have opted for this?
“Guaranteed DB pension benefits are very valuable. Advisers should be considering whether there are other options that meet the client’s objectives more effectively.”
The FCA is currently consulting on how redress is calculated for unsuitable pension transfer advice. The regulator is concerned that the way redress is calculated – which dates back to the Pensions Review in the 1990s – no longer puts consumers back in the position they would have been if they had stayed in the DB scheme.