New financial advice requirements where a consumer is seeking to transfer 'safeguarded' pension benefits have been published for consultation by the Financial Conduct Authority (FCA).
The FCA has proposed removing the existing presumption that such transfers, usually from defined benefit (DB) to defined contribution (DC) schemes, will be unsuitable for every consumer. However, it is also seeking to tighten the rules in many areas, including by requiring transfer advice to be given as a personal recommendation and changing the methodology behind the calculation used to illustrate to the consumer the value of the benefits being given up.
Christopher Woolard, the FCA's executive director of strategy and competition, said that the proposed new rules would ensure that transfer advice fully took account of the circumstances of the individual consumer.
"Defined benefit pensions, and other safeguarded benefits such as guarantees, are valuable, so most consumers will be best advised to keep them," he said. "However, we recognise that the environment has changed significantly, so we want to ensure that financial advice considers the customer's circumstances in full and recognises the various options now available to them."
The new rules have been proposed by the FCA in light of the "significant" changes to the pensions environment since the introduction of the pension 'freedoms' in 2015. This means that, for some consumers, transferring guaranteed benefits to a scheme allowing more flexible access to pension savings "may now be suitable when it wasn't previously", according to the FCA's consultation paper.
However, it remains the regulator's view that retaining safeguarded benefits "will be in the best interests of most consumers", the FCA said. Safeguarded benefits are benefits other than money purchase or cash balance benefits, and are usually backed by employer guarantees. Between 80,000 and 100,000 advice reports on such transfers are produced annually, according to the FCA.
The proposed requirement that advice on safeguarded benefit transfers come in the form of a personal recommendation is aimed at ensuring "appropriate protection for consumers", according to the FCA. Consumers must "understand the specific details of their safeguarded benefits, make an assessment of the value of this benefit for their specific circumstances and compare this to the value of alternative options" in order to be able to make informed decisions, the regulator said in the paper.
The FCA said that there was a "significant risk" that advice on pension transfers that did not take the form of a personal recommendation "results in action that is not in the best interest of the client".
"The cases we have seen where advice is given without a personal recommendation have often been associated with high risk transactions and scam activity," the FCA said. "We have also found these cases do not comply with the existing requirements."
The FCA has also proposed replacing the existing transfer value analysis (TVAS) method of valuing the benefits being given up with a new method, which it has called appropriate pension transfer analysis (APTA). The changes include an overhaul of the critical yield analysis exercise, which compares the safeguarded benefits with what the consumer would receive from an annuity, in order to better reflect the different options available to the consumer under the pension freedoms.
The regulator also intends to issue new guidance on the role of a pension transfer specialist, and will publish a separate consultation on the issue of 'insistent clients' later this year, according to the consultation paper.
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that the proposals around 'personal recommendations' in particular should be welcomed.
"This would give individuals confidence in the advice they receive and the decisions they make about what is often their largest asset," he said. "It would also give the adviser community a clear framework against which they could assess their advice, reducing the risk of another mis-selling scandal."
"With DB transfers at a record high and pension savers increasingly attracted by the flexibilities afforded by the 'freedom and choice' pension reforms, it's important to ensure that the advice regime is fir for purpose. The FCA's proposal would result in well-rounded advice that takes account of an individual's personal circumstances," he said.
The consultation closes on 21 September 2017, and the FCA expects to publish its new rules early next year.
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