Rules to improve quality of pension transfer advice confirmed

Rules to improve the quality of advice people receive when considering transferring their pension have been finalised by the regulator.

The rules mainly relate to transfers from “gold-plated” defined benefit (DB) schemes such as final salary pensions, which offer guarantees about the size of retirement income, to defined contribution (DC) pensions.

Consumer interest in pension transfers and demand for advice is high, with an estimated 100,000 members transferring out of their DB scheme each year, according to the Financial Conduct Authority (FCA), which published the rules.

More than six million people are eligible to transfer deferred benefits out of DB schemes and around £20 billion to £30 billion is moving out of DB schemes each year.

There have also recently been reports of people being offered large lump sums to transfer out of final salary pensions, which have become increasingly expensive to run as people live longer.

The FCA’s rules will require pension transfer specialists to boost their qualifications.

The watchdog had also been looking at the possibility of a ban on contingent charging, where a fee for advice is only paid when a transfer goes ahead, but it has not ruled anything in or out for now.

The FCA said responses to a consultation confirmed its initial analysis that the evidence does not show contingent charging is the main driver of poor outcomes for customers. It plans to carry out further work on the quality of advice.

Christopher Woolard, the FCA’s executive director of strategy and competition, said: “Any changes to our rules on contingent charging could have implications for the supply of advice.

“Because of the significance of this issue to all stakeholders in the market, we will carry out further analysis and consult on new interventions if appropriate in the first half of next year.”

The rule changes include a requirement for all pension transfer specialists to hold a specific qualification for providing advice on investments by October 2020, enabling advisers to identify whether a proposed pension scheme and investment solution is consistent with the client’s needs and objectives.

The watchdog said it also expects advisers to consider their client’s attitude to, and understanding of, the risks of giving up safeguarded benefits for flexible benefits.

DC schemes generally do not have the same advantages that final salary schemes have of the saver ending up with a guaranteed level of retirement income – although they do offer people the flexibility to take their pension cash how they want.

The FCA said that while most people will be best advised to keep their DB pensions and other safeguarded benefits, the environment has changed.

It said this is particularly the case since the introduction of pension freedoms in 2015, which apply to over-55s with DC pensions and give them more flexibility to access their pension savings.

As a result, there has been increased demand for pension transfer advice, as advice is mandatory under Government legislation for potential transfers valued at more than £30,000.

Nathan Long, senior analyst at Hargreaves Lansdown, said: “These final rules are incredibly important as it’s crucial that advice in this very complex area is of the highest quality, especially given the regulator’s starting assumption that giving up a defined benefit pension is generally not in members’ best interests.”