Advice provided to individuals in relation to defined benefit pension schemes (more commonly known as ‘Final Salary’ schemes) continues to be a key area of concern for the Financial Conduct Authority (FCA).
There have been record levels of enquiries in relation to the transfer of Defined Benefit pensions into Defined Contribution schemes, such as Self Invested Personal Pensions (SIPPs), given the desire of individuals to have more freedom and flexibility with their pensions.
The FCA has recently issued a publication on the key findings of their review of pension transfer advice which found that, of the 18 firms reviewed, only 48.1% of the advice given on transferring out of a Defined Benefit Pension was suitable for the individuals advised.
It is particularly important that firms advising on pension transfers ensure that their clients fully understand the implications of a transfer away from a Defined Benefit scheme, as it is often irreversible; with the merits, or pitfalls, of such a transfer, only becoming apparent years into the future.
The FCA noted that firms had failed to collect sufficient information on the client’s personal circumstances, and even where they did collect this information, it was not always fully considered when they made their recommendations.
Some of the observations made when determining whether suitable advice was given included (but was not limited to):
- Firms noting that a client wanted to take control of their pension, without exploring the reasons why;
- Firms assuming that the client wanted a similar income to what they currently earn, instead of obtaining details on their actual retirement plans;
- Firms recommending that clients transfer into multiple Defined Benefit schemes without considering whether the transfer of only one would meet their objectives.
- Firms using ‘investment risk analysis tools’ which were not designed to assess the risk of transferring from a Defined Benefit scheme.
- The use of long suitability reports which had unclear recommendations as to whether the client should proceed with a transfer, and did not fairly compare the benefits and disadvantages of Defined Benefit and Defined Contribution schemes.
The FCA has indicated that it will start a wide-ranging programme of activity with all firms in 2019, however, many clients would have already been affected by this unsuitable and unclear advice.
