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Pension savers who are incentivised to leave employer DB schemes could be receiving poor advice, says FCA

Out-Law News | 24 Jul 2014 | 11:43 am | 3 min. read

People who were offered an enhanced transfer value (ETV) if they transferred their pension savings from an employer's defined benefit (DB) pension scheme to a defined contribution (DC) scheme did not always receive suitable financial advice, according to the Financial Conduct Authority (FCA).

The regulator has conducted a review of such transfers and said that it had identified "a risk of customers losing out on retirement income due to poor advice" across a sample of 300 cases from bulk transfer exercises that took place between 2008 and 2012. Its thematic review of ETVs found that unsuitable advice had been given in a third of these cases, although the failings were not spread equally between the financial advisory firms involved.

Separately, the FCA issued a further warning of upcoming enforcement action against operators of self-invested personal pensions (SIPPs), after its third thematic review of the industry found that some firms were still failing to fulfil their regulatory obligations. In particular, it said that it was concerned that firms did not have the necessary expertise to assess high-risk and non-standard investments, and did not understand capital requirements and other prudential rules that applied to their businesses.

This week, the government announced that all private sector DB pension scheme members will be required to obtain independent financial advice before transferring savings to a DC scheme as part of the new 'freedom and choice' pensions regime, due to take effect next year. With this in mind, pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it was "all the more important" that scheme members received the right advice before making a transfer; whether the transfer was 'enhanced' or not.

"Advising on a transfer from a DB scheme to a DC scheme is no easy task, especially if the transfer is presented to a member as 'enhanced' or if there is a cash incentive," he said. "It is all too easy for members to misunderstand what is on offer. Advisers need to consider the value for money of the receiving scheme as well as the value of the transfer; and it is all too easy to overlook technical points – for example, AVCs may need to be transferred alongside the main DB benefits, and those AVCs may have a valuable guarantee."

"Some of the problem stems from limitations being placed on the advice. Advisers will need to consider the FCA's stance and update their own processes," he said.

An ETV is an increase in the pension transfer value offered by an employer to encourage DB pension scheme members to transfer benefits out of the scheme into a DC scheme, typically a personal pension. In the period covered by the review, the incentive may have also included a direct cash payment to the scheme member upon transfer although this practice has now been banned. Transferring pension savings from a DB scheme to a DC scheme also transfers the risk of investment underperformance and responsibility for investment decisions from the employer to the saver.

In its review, the FCA said that it had found unfair use of 'generic' templates so that the advice did not reflect specific member circumstances, or advice which focused solely on assumed investment returns and not the member's wider circumstances. Some advisors did not adequately establish the level of risk that members were willing and able to take on, or made recommendations which did not match the assessed risk profile of the member, it said in its report. The FCA intends to follow up its concerns with the financial advisory firms involved, which could involve requiring them to contact members and offer redress, it said.

In a separately issued letter to SIPP operators, the FCA said that a "significant number" of them were "still failing to manage" product risks to the detriment of consumers despite its recent guidance. It said that it had asked them to take immediate action to ensure that their businesses operate within the rules. "In our view, the failings we identified put UK consumers' pension savings at considerable risk, particularly from scams and pension fraud," the FCA said in its letter.

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested from the full range of investments approved by the UK government and tax authorities. However, they can involve investments in higher risk, unregulated products, and previous regulatory initiatives have focused on the need for consumers to sufficiently understand the risks not only of the SIPP itself, but also the underlying investment. In its letter, the FCA said that it had "already required several firms to limit their business" as a result of its reviews of the sector, and that further enforcement action would take place.

"The FCA's letter to SIPP operators shows that the FCA is taking a stern approach to any SIPP operators who may not have taken on board FCA guidance," said pensions expert Simon Tyler.

"SIPP operators should make sure they understand exactly what the FCA expects of them. The sector is likely to see a considerable increase in enforcement action over the next two years," he said.