The FSA has outlined plans to change the way pension transfers from defined-benefit to defined-contribution schemes are calculated in a move expected to prevent benefits being undervalued by up to £20bn.
The FSA says the proposed changes will ensure the assumptions used by advisers to calculate a pension transfer are consistent and that the growth rates used for illustrating the comparison to the member are “reasonable”.
Under the plans, the rules for calculating mortality will be aligned with those used by the Board for Actuarial Standards, making them consistent with the annual pension statements personal pension holders receive.
The FSA also proposes changing the inflation measure used in pension transfer assumptions to take account of the Government’s decision to switch from RPI to CPI indexation.
In addition, annuities will be calculated on a gender-equal mortality rate in line with the European Court of Justice’s decision in March last year.
Finally, the comparison provided to the member when a transfer takes place will have to take into account the likely returns of pension fund assets as well as the transfer of risk from the DB scheme to the member.
FSA director of conduct policy Sheila Nicoll (pictured) says: “It is vital that employees get a fair deal as more and more employers are looking to reduce liabilities by offering members of defined benefit schemes a move to a personal pension.
“As things stand, there is a high risk members receive unsuitable advice as a result of the mechanistic approach to analysing transfer values taken by some advisers. These changes are important to make sure that members’ interests are at the centre of any decision to transfer and that any advice to transfer is suitable.
“We have seen examples of advisory firms recommending a transfer when there is little or no justification to do so, or where the reasons given for an individual to transfer have nothing to do with their particular circumstances.
“We are not saying that every transfer exercise is bad and we recognise that there will be some people, albeit a small minority, who can benefit from such a move, but they must all be treated fairly.”
In October last year, pensions minister Steve Webb warned the Government will legislate against enhanced transfer value exercises if the industry fails to raise standards.
The Department for Work and Pensions has set up a working group charged with delivering a new framework for incentivised transfers from DB to DC schemes.