The FCA is finally working out a tenable position on the taking of DB transfer values. I suspect that it now considers anyone who would rather have a pension pot rather than a pension “vulnerable”. Which is a pretty tough view.
Yesterday it produced some guidance to advisory firms still engaged in advising on and arranging transfers which I see as pretty sound. Here is the guidance in full
Consumers’ personal circumstances may mean they have characteristics of vulnerability that may impact their decision making. When consumers seek advice about transferring a defined benefit (DB) or other pension benefits, firms should be alert to potential indicators of vulnerability. Firms should create an environment where consumers feel they can disclose their needs and have structures in place to provide suitable support.
Consumers with characteristics of vulnerability
Due to their personal circumstances, a consumer may be especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care. Consumers seeking advice on transferring out of pension schemes may have characteristics of vulnerability.
Consumers with DB schemes may be in the following circumstances:
- they may be worried about the financial situation of their DB scheme’s sponsoring employer
- they may be concerned about the solvency of their DB pension scheme
- they may have heard their DB scheme is at risk of going to the Pension Protection Fund (PPF)
- they may be in serious financial difficulty due to the cost of living
Any of these circumstances may cause a consumer to seek financial advice. For some, the pension scheme will be their only retirement provision aside from their state pension.
Consumers in these situations may also be susceptible to scams or fraud. The following are warning signs that consumers may be more vulnerable to scams or fraud activity:
- they may appear overconfident in their decision making despite low knowledge of pensions or investments
- they may be experiencing distraction from personal life events
- they may be experiencing financial dissatisfaction
- they may be in cognitive decline or socially isolated or lonely
- they may appear in a hurry or agitated about arranging the pension transfer
Consumer Duty, vulnerability and pension transfers
Our Consumer Duty raises the standards we expect of firms, which includes new rules for the treatment of those customers who are in vulnerable circumstances. Firms should assess their approach to vulnerability for pension transfer customers and ensure that they are meeting the requirements and take the following steps:
Identify when customers with DB pensions are likely to approach them for advice and design and deliver support to meet their needs. In a two-adviser model firms should properly consider the customer’s particular circumstances and whether there are any indications the customer has been coached or influenced to transfer. In some cases it may be appropriate to have joint meetings with customers to manage the risks of communications being misinterpreted by either of the firms, or by the customer.
Encourage customers requesting a pension transfer or advice to disclose information where they see clear indicators of vulnerability.
Tailor communications to retail customers, considering the characteristics of retail customers, including those of vulnerability.
Where firms interact with customers based overseas, they should also consider whether their customers are susceptible to scams or fraud and look for the warning signs above. Firms providing overseas pension transfer advice should ensure that their service does not adversely affect groups of customers in the target market, including those with characteristics of vulnerability.
Is there such thing as an invulnerable DB transfer customer?
Although the FCA doesn’t to so far as to say so, I think they believe that “vulnerability” is the chief reason for people to take a transfer and that those who think they will be better off with a pot than a pension are so delusional , they can be counted as vulnerable too.
Following this logic , we might question whether a trustee of a pension scheme offering CETVs in exchange for a DB promise, might not want to start throwing red and yellow flags every time that a transfer request comes his/her way.
On what was admittedly a quiet news day, Professional Pensions ran the fact that transfer values aren’t happening as its lead story.
Transfer activity continued its downward trajectory during July – with an annualised rate of only 19 members per 100,000 transferring out of their current scheme to an alternative arrangement, latest data from XPS Pensions Group shows.
CETVs are too small, advisers too few, payment advice too expensive, PI too exclusive and most of all, the FCA too concerned about “vulnerability”.
There are a number of reasons for it, but the facts speak for themselves, DB transfers are now as rare as hen’s teeth.
Time to make DB transfers “at the trustee’s discretion”?
Right now, trustees have no means to block a DB transfer unless they can find a flaw in the advisory process. The FCA’s guidance suggests that even if the advice to transfer makes sense from a financial point of view, the transfer motivation needs further investigation to ensure the client isn’t being defrauded and isn’t bonkers.
I repeat that the FCA clearly view people wanting to take a transfer are “vulnerable” in some way and on the spectrum of vulnerability is included the customer who thinks he/she will do better with the transfer than the pension.
If this is the case, then give the trustees the power to intervene and say that DB transfers will only be paid if they – the trustees – feel it is in the interest of the member to forsake the pension.
This is not radical, it is what trustees do – all the time – adjudicating on the payment of death benefits and disputes over mis-understandings over scheme rules.
I am not suggesting that this would do away with the need for advice, but I think that a system of “clearance” could be introduced , where trustees could agree to clear a transfer – subject to its financial viability stacking up – according to the financial advice offered.
This might lead to an increased workload on trustees , but at 19 transfers per 100,000 members, this should not be insurmountable.
We all have the right to a DB transfer value but should we have the right to transfer?