UK regulator makes changes to final salary pension transfer rules

The regulator has banned financial advisers from getting paid only when a client moves a final salary pension pot, a move widely welcomed but experts warn may have one big unintended consequence. 

The Financial Conduct Authority (FCA) has for the majority of cases banned financial advisers from getting paid only when a client moves a final salary pension pot (a practice known as contingency charging).

The charging structure relating to final salary or defined benefit (DB) transfers had plenty of critics, among them the government’s Work and Pensions Committee (WPC). The WPC has previously voiced that contingency charging is a “key driver” of poor advice, as it creates an incentive for advisers to recommend that their clients transfer out, whether it is the best option for them or not. 

Following a review, which has taken nearly a year to complete, the FCA has put a ban in place for most circumstances. The exceptions are for pension scheme members in serious ill health and unlikely to live until age 75, and those in serious financial hardship.  

The FCA said the ban will remove “conflicts of interest” and “help good advisers, who will often advise to stay put, to compete.”

Christopher Woolard, interim chief executive of the FCA, says: "The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high. While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.

"What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards."

The FCA has over the past couple of years expressed concerns over the high proportion of consumers being given the green light to transfer out of the salary-based schemes – which typically offer an index-linked income for life, plus benefits.

The FCA’s stance, which is a sensible one, is that the default position should be that a transfer is probably not in a person’s best interests. But there are situations where a strong case can be made to consider a transfer, as we explain here. 

Following the ban, the FCA says financial advisers will be able to give a short form of paid-for advice (abridged advice). This will enable individuals for whom a transfer will probably not be deemed suitable by the adviser to receive lower-cost advice, rather than having to pay up-front for full advice.

While it is unclear how much financial advisers would charge for abridged advice, an upfront fee will likely price out savers with smaller pots from transferring. The rules state that anyone looking to transfer out of a defined benefit pension scheme needs to get financial advice before doing so if their pot is worth more than £30,000.

Steve Webb, partner at LCP, makes this point. He says: “The need for affordable, high-quality advice is likely to be greater than ever, and it is right to crack down on firms who have given poor-quality advice.  But forcing members to pay high upfront charges for advice will act as a barrier.  For those who do find thousands of pounds up-front for advice there a risk that they will then be determined to go ahead with the transfer even if it is not in their best interests.”

Steven Cameron, pensions director at Aegon, shares the same concerns. He notes: “We have always supported the FCA’s abridged advice concept and we hope advisers will look at this in detail to see if it can help them ‘filter out’ DB members not suited to transferring. However, it is yet to be seen if this approach can be made sufficiently cost-effective for its widespread use, particularly as it must still involve a Pension Transfer Specialist.

“Some individuals simply can’t afford to pay upfront, even where transferring might have been in their interests, and with advice legally required ahead of transferring, the ban means some will be unable to explore their statutory right to transfer.”

As a result, a potential unintended consequence could be a sharp reduction in the number of cases where it is in the individual’s best interest to transfer. 

Putting barriers in place by restricting choice is not in the spirit of the pension freedoms, notes Andrew Tully, Technical Director at Canada Life. He adds: “Most people are likely to be better remaining in their DB scheme; however, a transfer may provide the best outcome for some people with specific circumstances, such as ill-health or being heavily in debt.

“While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them.  Otherwise we run the risk of stopping people exercising control over their pension savings and preventing some from achieving the best outcome.”