June 28
Pension transfer advice shake up finally announced

There have been numerous reports in the pensions press recently about the increased volume in pension transfers since the new freedoms were introduced in April 2015.  Some have even made it into the wider media – the FT today announcing that “cash outflows from pension plans jump 17% after reforms”.  Given the aforementioned reforms were announced in George Osborne’s March 2014 budget, to say that the consultation on pension transfer advice launched by the Financial Conduct Authority (“FCA”) last week is long overdue is something of an understatement.

The message from the FCA in the consultation document is clear.  It is also consistent with the Pensions Regulator’s stance on the potential transfer of DB rights.  Both believe that for most people with DB benefits, the guarantees they have are valuable and they would be best advised to keep them.  With that in mind, the FCA say that suitability reports produced by advisers should include a prescribed “transfer value comparator”, presented in a prescribed manner.  They give the following example of what that might look like in the consultation document:

“The transfer value offered instead of your pension income is: £120,000
How does this compare with the amount you need to buy the same income on the open market?
FCA eg.png
It could cost you £140,000 to obtain a comparable level of guaranteed income on the open market.
This means the same retirement income could cost you £20,000 more by transferring.”
The consultation has been greeted with a mixed reception by the industry.  Some have welcomed the fact that greater emphasis is being placed on suitability and that under the new rules, the adviser would be required to make a personal recommendation.  An unwelcome consequences of this is that the cost of advice, which can already be prohibitively expensive, is likely to rise as a result.  Others have criticised the proposals for requiring advisers to compare the cost of securing the DB benefits with an insurance company to the transfer value on offer, arguing that it would be perverse for an individual to buy back the guarantees they had given up at a later date.
If advisers are required to calculate and present information in this manner before making a recommendation to transfer, explaining the stark comparison that is likely to be revealed in the majority of cases will present a significant challenge.  Only time will tell whether a requirement to present information in this way will slow the recent flood of transfers out of DB pension schemes.

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