The FCA has raised concerns about the sustainability of pension transfer advice
We are all familiar with the issues around defined benefit (DB) pension transfer advice – unsuitable advice, professional indemnity (PI) cover, continuing Financial Conduct Authority (FCA) supervision and policy developments, among others. Unfortunately, I do not see any quick and easy resolution to these issues.
In my opinion, there is only one way to resolve the issue in the medium term and that is for the advice sector as a whole to raise standards, particularly raising the rate of suitable advice cases. In time, this will mean the FCA will no longer feel the need to continue its extensive work in this area and the PI cover issues will improve.
But the advice sector will not improve standards until it sees that it is part of the problem. It seems that every adviser or firm I speak to (or read about in the press or social media) believes the problem is down to a few dodgy firms – it’s not us, it’s someone else. I am completely convinced that this is not how the regulator sees it, based on my experience at the FCA, several speeches and roundtable meetings with the FCA since, as well as the regulator’s update on supervisory findings from December 2018, which highlighted issues around normal firms just not doing their job well enough.
So, where are the differences between the FCA and some (many?) advisers? I would flag three areas where there may be differences:
1. Pensions are for retirement income
In the context of pension freedoms, FCA supervision director Debbie Gupta recently said: “The risk here is that people may be distracted from the original purpose of a pension, which is to provide them with money when they are no longer working.” Yes, the freedoms allow many options and great flexibility for clients, but first and foremost, clients need an income to live off in retirement. Or, as the FCA said: “Good advice should seek to ensure that clients’ income needs are met, that they support their dependents and that they get to keep the lifestyle they have planned for.”
This is also about managing longevity and client biases. The FCA flagged that the freedoms involve drawbacks – for example, the temptation to dip into the pension pot – and added: “This is why it is important not only to consider how the client intends to access their pension, but also their behavioural patterns and their attitude to spending.”
The FCA Handbook includes the requirement to consider the client’s “attitude to transfer risk” – their attitude to certainty in retirement. Ms Gupta explained: “If the client is looking for certainty of income for as long as they live, then surely this will steer your advice in one direction [i.e. keeping the DB scheme].”
2. Prioritising needs over wants
Generally, a client may want flexibility or to leave money to children, but they need an income for life. Clients may want certain things but suitability, and acting in the client’s best interests, mean that advisers must prioritise needs over wants. Clients may not see it this way, but the FCA said: “We recognise the reality of behavioural biases, that your clients might place more value on a lump of cash now and less value on an income throughout an unknown period of time. However, your role is to challenge those biases; to help the customer balance their immediate desires with their long-term needs. To help them prioritise what is really important and make the difficult but informed compromises many must make.”
I have talked before about the client’s ‘core secure income’. Sources of core secure income include state pension, DB, annuity, guaranteed third-way products and (not quite so secure) good-quality rental income. If a client has sufficient core secure income to meet not only their fixed outgoings but also money for discretionary spending to broadly maintain their standard of living, then this is great financial position to be in. If the DB scheme is needed for this, keep the DB scheme. If a small annuity top-up is needed, recommend this (Ms Gupta referred to blended solutions).
In time, this will mean the FCA will no longer feel the need to continue its extensive work in this area and the PI cover issues will improve
3. Considering alternative ways of meeting the client’s objectives
The FCA Handbook says you need to do this. For example, does the client have other assets – additional DC pension funds, ISAs, cash savings – that allow them the flexibility they want? If so, recommend this course of action. Indeed, if the client has sufficient core secure income, the other assets can provide real flexibility; whereas with a transfer, flexibility is limited by the need to ensure the fund lasts long enough. A DB transfer should be considered the last-resort way of meeting the client’s objectives and only then if this addresses their needs in preference to the client’s wants.
All this adds up to considering the starting point as assuming that a transfer will not be suitable and not to recommend a transfer unless it is clearly in the client’s best interests – a position stated in the FCA Handbook. But Ms Gupta was keen to point out that there are possible parallels with what the FCA says about DB transfers in retirement advice more generally.
The clear example is asking all at- or in-retirement clients about their views on certainty in retirement, to help shape your retirement income advice.
Rory Percival of Rory Percival Training & Consultancy Ltd