Fair deal' call over pension swaps

FSA signEmployers will need to offer higher incentives to workers for them to transfer their pension into a personal scheme under proposals from the finance watchdog.

Employees must receive a "fair deal" as firms are increasingly looking to cut their liabilities by offering members of defined benefit schemes a move into a personal pension, said the Financial Services Authority (FSA).
There is currently a high risk that members could receive unsuitable advice about what they will receive when they retire, the FSA said, describing the issue as "complex".

The FSA estimates that the changes it proposes will prevent an under valuation of benefits of up to £20 billion.

Pension transfers take place when a pension is moved from a defined benefit scheme such as a final salary pension to a personal pension scheme. Retirees can convert a personal pension fund into an annuity or draw money from the fund, known as income drawdown, to provide regular payments.

Defined benefit schemes have become increasingly costly for employers to run as investment returns have dropped and people have been living for longer. A massive overhaul of the pension system is due to start this October with the phasing in of automatic enrolment into schemes, starting with larger companies.

The FSA said the assumptions advisers use for the comparison should be applied consistently by all firms and take account of recent UK and European legislation, using "reasonable" growth rates for illustrating the results of the comparison to the member.

Sheila Nicoll, the FSA's director of conduct policy, said: "As things stand, there is a high risk members receive unsuitable advice as a result of the mechanistic approach to analysing transfer values taken by some advisers. These changes are important to make sure that members' interests are at the centre of any decision to transfer and that any advice to transfer is suitable.

"We have seen examples of advisory firms recommending a transfer when there is little or no justification to do so, or where the reasons given for an individual to transfer have nothing to do with their particular circumstances. We are not saying that every transfer exercise is bad and we recognise that there will be some people, albeit a small minority, who can benefit from such a move - but they must all be treated fairly."

A consultation exercise on the proposals closes on March 27.
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