FCA Pension Transfer Advice Guidance

FCA Pension Transfer Advice Guidance.

The financial industry regulator, the Financial Conduct Authority (FCA) has again issued guidance to financial advisers when dealing with the higher risk area of pension transfers.

Many people think about pension transfers to get lower charges, improve fund performance, death benefits, access flexible drawdown or to transfer defined benefit and salary related pensions with high cash equivalent transfer values.  What surprise many is the ‘red tape’ that financial advisers have to negotiate or indeed the higher fees that advisers charge to reflect the works involved.

What many consumers think:

To the consumer a pension transfer is a simple matter of “this is my pension, I’ll do what I want with it”.  After all its only a little research the decide on the pension and complete a few application forms.

Reality, what advisers face:

A summary of the FCA guidance:  FCA Expectations

They expect firms advising on a pension transfer from a defined benefit (DB) scheme or other scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme. It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.

There rules set out what a firm must do in preparing and providing a transfer analysis. In particular, their rules require a comparison between the benefits likely (on reasonable assumptions) to be paid under a DB scheme or other scheme with safeguarded benefits and the benefits afforded by a personal pension scheme, stakeholder scheme or other pension scheme with flexible benefits.

The comparison should explain the rates of return that would have to be achieved to replicate the benefits being given up and should be illustrated on rates of return which take into account the likely expected returns of the assets in which the client’s funds will be invested. Unless the advice has taken into account the likely expected returns of the assets, as well as the associated risks and all costs and charges that will be borne by the client, it is unlikely that the advice will meet FCA expectations.

What this means for advisers

A firm advising on a pension transfer should not undertake a comparison using generic assumptions for hypothetical receiving schemes. The firm must take into account the likely expected returns of the assets in which the client’s funds will be invested as well as the specific receiving scheme.

Section 48 advice

Section 48 of the Pension Schemes Act 2015 requires that trustees or scheme managers check that advice has been taken before allowing a transfer to proceed, where the proposed transfer involves a DB pension or other safeguarded benefits worth more than £30,000. The advice must be provided by a firm with the FCA permission to advise on pension transfers. FCA rules apply to advice provided by FCA authorised firms and, in particular, the FCA expects the firm to consider the assets in which client’s funds will be invested as well as the specific receiving scheme.

Recommendations based solely on critical yield

The FCA’s supervisory work has revealed that some firms have been recommending pension transfers based solely on whether or not the critical yield is below a certain rate set by the firm for assessing transfers generally. This does not meet FCA expectations. The critical yield is the rate of return that would have to be achieved in the defined contribution (DC) pension scheme to replicate the benefits of the DB benefit scheme. They would expect the adviser to consider the likely expected returns of the assets in which the client’s funds will be invested relative to the critical yield. The firm should also consider the personal circumstances of the client before making any personal recommendation, taking into account specific other factors as they apply to the client.

Insistent clients

An insistent client is a client who wishes to take a different course of action from the one the adviser recommends and wants the adviser to facilitate the transaction against the advice. Where clients are required to take advice (for example in relation to DB pensions and other safeguarded benefits) then some may decide to disregard that advice.

There are 3 key steps to take when advising an insistent client:

1. Advisers must provide advice that is suitable for the individual client and this advice must be clear to the client. Advice on pension transfers should follow the normal advice process for pension transfers.
2. Advisers should be clear with the client what the risks of the alternative course of action are.
3. Advisers should be clear with the client that their actions are against the advisers advice.

Advice on pension transfers to overseas schemes

The FCA acknowledges that non-UK residents considering a pension transfer are likely to need to seek advice from both an overseas adviser for investment advice and a UK adviser for advice on the proposed transfer. In order to advise on the merits of the proposed transfer, the UK adviser should take into account the specific receiving scheme, including:

• the likely expected returns of the assets in which their client’s funds will be invested
• the associated risks, and
• all costs and charges that would be borne by their client

This means liaising with the overseas adviser where necessary.

Other advice on pension transfers

Advice may be provided on pension transfers where there is no requirement that advice be taken, for example where the value of the safeguarded benefits is £30,000 or less. Regardless, FCA rules apply to the advice that is provided and, in particular, the FCA expects the adviser to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme.

Personal recommendations

Advice to a person that is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person, constitutes a personal recommendation. In making personal recommendations, the adviser will need to comply with FCA requirements regarding the suitability of the advice provided. The adviser should make clear the loss of any safeguarded benefits and the consequent transfer of risk to the client, including:

• investment risk
• longevity risk, and
• the risk that products may not be available or cost effective to meet the client’s needs in retirement

FCA guidance on the suitability of pension transfers states that when a firm advises a retail client on a pension transfer it should consider the client’s attitude to risk including, where relevant, in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.

Advice on pension switches

Where no safeguarded benefits are involved, the FCA calls a transaction moving pension benefits from one personal pension scheme to another personal pension scheme a ‘pension switch’. There is no requirement to take advice.

However, where advice is provided and the advice is either to proceed or not to proceed with a proposed switch, taking into account the client’s personal circumstances, the firm is making a personal recommendation. The firm will need to comply with FCA requirements regarding the suitability of the advice provided. Where the adviser recommends a pension scheme knowing that the client will switch from a current pension arrangement to release funds to invest through the scheme, then the suitability of the assets in which the client’s funds will be invested must form part of the advice given to the client.

Comment

All of this must be documented and in a full written report covering the pros and cons of all.