The Financial Ombudsman Service has ruled against Friends Life for giving unsuitable advice on a pension transfer from a defined benefit scheme.
In the ruling Mr S complains the advice he received from Friends Life to move pension benefits from his former employer’s final salary scheme to a personal pension arrangement was not suitable.
In April 2000 Mr S was advised to transfer to the personal pension on the basis that it was likely to provide greater benefits than his former employer’s scheme.
The transfer value analysis provided to Mr S at the time showed that the rate of return required to match Mr S’s existing pension benefits was around 7.5 per cent.
Therefore, to match the benefits Mr S was giving up, his pension pot would need to grow at approximately 7.5 per cent each year.
Based on the information available, it does not appear that Mr S’s attitude to investment risk was recorded at the time the advice was given.
It appears Mr S’s family was financially dependent on him and there is nothing to suggest he was an experienced investor.
In 2016, Mr S complained to Friends Life as he did not think the advice he had received was suitable.
Friends Life did not uphold Mr S’s complaint and said the growth rate, of around 7.5 per cent per year, needed to match the benefits from Mr S’s scheme would have been considered achievable at the time the advice was given.
Mr S was not satisfied with Friends Life’s response and brought his complaint to the FOS where the adjudicator thought the complaint should be upheld.
The adjudicator said the rate of growth needed to match the benefits Mr S would have been entitled to from his former employer’s pension scheme was a high-risk strategy.
Furthermore there was no evidence to show Mr S was willing to take such a risk.
Friends Life confirmed it had received the adjudicator’s view but did not say whether it accepted it and so the complaint was passed on to ombudsman Suzannah Stuart.
Stuart agreed with the adjudicator and upheld the complaint for similar reasons.
She notes the transfer value analysis carried out at the time showed that the rate of return required to match Mr S’s existing pension benefits was around 7.5 per cent.
However, Stuart argues a growth rate at least 1 per cent higher than 7.5 per cent was needed to make it worthwhile for Mr S to take the risk associated with transferring.
On this basis, Mr S’s personal pension would have needed to achieve a growth rate in the region of 8.5 per cent per year to provide sufficient benefit for the risk of the transfer.
The suitability report does not describe Mr S’s attitude to investment risk, so it is not possible to say with any certainty how much risk he wanted to take with this pension pot.
Stuart says based on fact-find information she does not think Mr S was in a position to take a high level of investment risk in the hope of beating the benefits he would have been entitled from his former employer’s scheme.
While Stuart accepts it may not have been unreasonable in 2000 to anticipate growth rates of around 8.5 per cent she adds Friends Life should have realised the investments needed to generate this return would be too risky for Mr S.
Therefore, she concludes the advice Mr S received was not suitable and the investment risk associated with the transfer was too great for Mr S’s personal and financial circumstances.
She orders Friends Life to compensate Mr S based on the FCA’s updated guidance on unsuitable DB transfers from an occupational scheme to a personal pension.
Stuart adds the compensation in respect of any future loss should if possible be paid into Mr S’s pension plan, allow for the effect of charges and any available tax relief.
An Aviva spokeswoman says: “We’re unable to comment on the details of this specific case but will abide by the ombudsman’s decision.”
Aviva acquired Friends Life in 2014.