City watchdog attacks final salary pension advice

21 July 2014

People who have been advised to switch from a final salary pension scheme to a defined contribution alternative may have been poorly advised, according to the City watchdog.

The Financial Conduct Authority (FCA) said people who were offered 'enhanced transfer value' incentives (ETVs) to leave their employers' defined benefit pension scheme risk losing out on retirement income due to poor advice.

It studied around 300 pension transfer cases between 2008 and 2012 and found that a third of cases involved unsuitable advice. But the watchdog did not go as far as banning the practice outright.

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Clive Adamson, director of supervision at the FCA, said: "Transferring from a defined benefit scheme to a defined contribution scheme is an important decision for consumers. It is disappointing that our review saw failings in the advice given, particularly when incentives have been provided to consumers to transfer.

"All firms active in this complex area of pension transfer activity should think very carefully about the quality of the advice process and assurance framework required to deliver fair customer outcomes."

Those affected were offered enhanced pension transfer values, some in the form of a direct cash payment. But people who switch out of a DB scheme lose the underlying guarantee of a final salary at retirement and must also take on responsibility for investment decisions that affect their underlying fund.

With that in mind, the FCA said many firms failed to tailor advice to reflect the specific circumstances of individuals, nor did it establish people's attitude to risk. Many also made unsuitable fund recommendations, and did not take into consideration the tax implications of individuals.

The FCA said it will contact the firms involved and ask them to offer redress to affected clients, where appropriate. But it urged anyone who has "immediate concerns" about the financial advice they were given to contact the firm that advised them in the first instance.

Attractive choice

A spokesperson for Standard Life welcomed the fact that the FCA did not ban the practice completely: "For very many pension savers, a DB to DC transfer is not appropriate. But many DB pensions won't offer savers greater flexibility in taking their retirement income. DC pensions allowing more choice may be attractive for some people from the age of 55 when the new flexibility begins."

The watchdog also warned that many self-invested personal pension (Sipp) providers are failing to fulfill their regulatory obligations, despite previous warnings. It said many firms did not have the expertise to advise on higher-risk or non-standard investments but were doing so anyway.

The FCA has written to chief executives of all Sipp firms to warn them of the failings uncovered by its recent review, warning them to take action to address the failings.

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