The FCA is expected to release its consultation on advising on pension transfers on Wednesday this week and has been reviewing the processes of individual advice firms which has resulted in some of them ceasing to advise on DB transfers.
In new research carried out by AJ Bell, 80% of advisers questioned said they are still advising on DB transfers and so urgent clarification is needed from the FCA on whether it plans to update the current guidance available to advisers.
The regulator needs to set a clear timetable for the reform of DB transfers and the consultation should cover three key areas:
1. The current regulatory presumption that a DB transfer is unsuitable.
The FCA rules still stipulate that an assessment of DB – DC transfers must start with the presumption that it will not be in the client’s best interests. It is questionable whether this is still relevant in the post-pension freedoms market and at a time when many DB schemes are in deficit. The consultation should ask whether the current presumption of unsuitability is still appropriate in today’s market or whether the suitability of a transfer should be based purely on each individual’s circumstances and needs.
2. TVAS assumptions.
79% of the advisers surveyed by AJ Bell don’t believe that annuities remain the appropriate basis upon which to assess critical yield calculations post pension freedoms.
With more people opting for income drawdown post pension freedoms, those critical yield figures are no longer the only factor. Some people might place a higher value on being able to access their pension early or in a more flexible way and for others the generous DC death benefits may be an attraction.
3. The advice process and charges.
Although the majority of advisers are advising on DB transfers, many of them are adopting a cautious and prudent approach in their processes:
Two thirds (67%) will only do so as part of a full financial plan
70% will not accept insistent clients if their advice is not to transfer
89% carry out an initial triage process to determine whether a full transfer process is appropriate
99% carry out a full attitude to risk / capacity for loss assessment
76% include cash flow modelling for the client as part of the transfer assessment
When it comes to charging, half of advisers questioned charge a percentage of the transfer value (contingent charging), 25% charge a fixed amount and 16% charge on a time / cost basis.
Mike Morrison, head of platform technical at AJ Bell, comments:
“It is slightly mystifying that the FCA has not yet confirmed the full scope and timetable for its consultation on DB transfers but hopefully we will get more clarity this week. The volume of activity around DB transfers is higher than it has been for years and the regulator is clearly looking closely at some firms, but then it is leaving the majority of the market to operate in a bit of an information vacuum.
“The ghost of the 1990’s misselling scandal is clearly hovering all over this but that focused just on transfers that went ahead when they shouldn’t have done. Avoiding that is just as important today, but we now face an equally problematic situation – transfers that should go ahead but don’t because of fear of regulatory sanction. That is also a poor customer outcome.
“Advisers urgently need some clarity around what the FCA expects of them. This must cover the FCA’s current stance on DB transfers post pension freedoms, the TVAS assumptions which are now hideously outdated and expectations around the advice process and charging options.
“A lot of the DB transfer process can be affected by behavioural bias. Post RDR we must remember that “advice” is the product and that advice not to transfer could and will be for many the most suitable outcome. This is particularly relevant where advisers are operating any form of contingent charging.”