Advisers have backed concerns raised by former FCA technical specialist Rory Percival that some firms may be putting a “sheen of suitability” on defined benefit pension transfers.
In a blog post last week, Percival said he was worried some advisers thought a DB transfer was “ticking a box” if the client wanted flexible benefits and assets to pass on to spouse and children at death.
While Percival said many advisers thought the FCA would always consider a DB transfer with a very high critical yield to be unsuitable and the suitable advice can be to transfer even with a high critical yield, box-ticking was resulting in unsuitable recommendations to transfer and other options might not have been considered.
Percival wrote: “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 while retaining the valuable guaranteed DB benefits, would the client have opted for this?”
Ovation Finance managing director Chris Budd says: “Rory is right to raise it as an issue. There are plenty of people who are doing it for good reasons but firms jumping on it is wrong.
“There are occasions where a DB transfer is the right thing for the client. No doubt that might be the case where we never would have supported it not too many years ago. But is that the reason people are transferring? Possibly not.”
Budd also expresses concerns about the impact on future compensation from those firms giving unsuitable pension transfer advice.
“If someone is trying to find an excuse, what would worry me in five years’ time when the claims companies come knocking is how robust your advice is. Will they still be in business and will I have to pay for them through the FSCS?”
Delta Financial Management adviser Jarrod Ellis says Percival is right to focus not just on critical yield but on other factors too. He says: “I’m sure there are [people who use it as a tick-box]. I haven’t come across bad practice personally, but the people that talk to us are generally good advisers and pretty clued up.
“It needs a multi-dimensional approach; does the client want flexibility? Yes. Does the client want to pass the money on? Yes. However, if the client has a low attitude to risk, they don’t have the attitude to risk to give them a decent pension for them.
“The default position should be that you should take benefits from the final salary scheme. If, however, you got through lots of different protocols, wanting flexibility and control but also having the right attitude to risk, capacity for loss and pass some kind of hurdle rate, you start to look at something being more suitable.”