When – in April 2015 – the government gave people over the age of 55 more control over the use of their defined contribution (DC) pension pots, and the ability to drawdown their pensions as they saw fit, this was generally viewed as a positive change. Such pension freedoms were not extended to defined benefit (DB) arrangements, however, and there was a fear that people could make life-changing wrong decisions by transferring from defined benefit arrangements in order to access these increased freedoms, oblivious to the potential ramifications. For some, depending on their circumstances, such a transfer may be the correct decision. But the Financial Conduct Authority (FCA) has repeatedly recommended that the starting position for advisers is that DB-to-DC transfers are likely to be unsuitable for most members.
To protect DB pension scheme members from making bad decisions, the law requires anyone whose transfer value from a DB arrangement is more than £30,000 to take financial advice on the transfer. Preferably this would be from an adviser suitably authorised by the FCA.
Therefore it is worrying that the FCA has uncovered evidence that advisers are giving members bad guidance on pensions. This is to such an extent that the FCA publicly acknowledged that it is ‘deeply concerning and disappointing’ to see transfers being recommended at the levels they have discovered. The FCA surveyed 3,015 firms between April 2015 and September 2018, and found out of 234,951 scheme members who had received advice, 162,047 members (69%) had received a recommendation to transfer out. 1,454 firms had recommended that 75% or more of their clients take a transfer. Proportionally, this just doesn’t add up.
The FCA’s last update on this, in December 2018, found that amongst firms they had focused their investigations on, the advice to make a transfer was suitable in fewer than 50% of cases. While the number of recommendations to transfer is not necessarily indicative of the quality of advice given, it can act as a warning sign. Thus the FCA has committed to directly assess the firms most active in this market throughout the remainder of 2019.
The FCA correctly says that deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make. Despite this, its message that a DB-to-DC transfer is unsuitable for the majority of people is falling on deaf ears, including, in some cases, those ears which belong to advisers.