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IFAs back ‘sheen of suitability’ DB transfer concerns


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.”



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

  1. Christopher Lean 7th December 2016 at 1:18 pm

    I think the FCA should look at the UK firms that are signing off large numbers transfers for unregulated offshore advisers to get the DB schemes into ROPS and all sorts of “interesting” funds- leading to the inevitable results in retirement.

  2. There simply shouldn’t be a “default position”. Since the introduction of the pension freedoms, there will be a great many people for whom transferring out (at retirement) to buy an annuity or use drawdown etc. will be the appropriate option; therefore, every case should be looked at on its merits and in my opinion everyone with a DB pension should consider this option if it is available. In fact, I’m pleased to note that many DB schemes are now including a transfer to a DC scheme as a standard option on their retirement packs. But, I quite agree with the article in highlighting the risk that the availability of flexibility might become a cynical sales pitch for the less professional advice firms out there.

  3. “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?”

    I have one at the moment. Anticipated income from DB scheme £25,000 p.a. CETV £800,000. Premium for £800,000 JLFD WOL around £12,500 per annum, or half the income. How would that make sense?

    • Well said Paul. I think this highlights the problem. The regulator thinks of possible options that might or could or possibly without actually knowing the facts. Looks like former regulator employee still thinks with the same mentality as he used to.

  4. This is going to become more and more high profile this was the article in the FT last Friday…

  5. It is not a “guaranteed income”, It is a promise to pay an income. And for those people already receiving their pension income the whole amount is not “guaranteed” if they are a high earner and the scheme goes into the PPF due to the operation of the PPF cap.

    In addition their pre 6th April 1997 scheme pension income will no longer receive annual increases if it goes into the PPF Is that “guaranteed”? No.

    How many more schemes will go into the PPF? Will the PPF benefits have to be scaled back?

    Lose the word “guarantee” please.

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