By Sweeny Kamur
The pension laws and systems in the UK have undergone significant changes in the recent past. In April 2015, pension freedoms were introduced to give individuals better and higher access to their pension funds and the choice to transfer their pension funds from defined benefit schemes to defined contribution schemes, and vice versa.
Since the introduction of pension freedoms, the government has regularly assessed the firms advising on pension-related matters and the suitability of their advice. The government agencies involved in the process include The Pensions Regulator (TPR) and The Financial Conduct Authority (FCA).
While the TPR deals with workplace pensions and their regularity, the FCA is responsible for maintaining appropriate levels of consumer protection and competition across the pensions landscape.
The FCA has released a package of measures to cater to the weaknesses in the market. It is a step towards protecting the interests of the defined benefit pensioners. The steps include a blanket ban on contingent charging to prevent the conflicts of interest for the financial advisors.
Currently, a financial advisor is paid only when the customers transfer their pension. This payment is known as contingent charging and it creates a situation where advisors might become biased towards transfers and recommend the transfers to their customers.
Therefore, the financial advisors will be banned from contingent charging, with effect from October 1, 2020. The advisors will be expected to offer a workplace pension scheme as the receiving scheme for the transfer. If they recommend otherwise, they will be required to justify their recommendation for suitability.
Pensioners who transfer out of a defined benefit pension scheme have other pensions and investments or have a limited life expectancy
The changes have been made by the FCA to protect the interest of the defined benefit pension scheme pensioners. The FCA had observed too many cases wherein the pension transfers were not in the best interests of the customers and the transfers were recommended to meet the interests of the financial advisors.
Astonishingly, one out of six files studied by the FCA showed signs of unsuitable advice! The unreasonably high levels of unsuitable advice can have serious consequences for customers and can worsen their retirement. If they transfer out of a defined benefit pension scheme, the transfer cannot be reversed.
A transfer means that pensioners lose a guaranteed lifetime income and protection offered by the defined benefit pension scheme. They have to start making investment decisions and contributions to their defined contribution pension scheme.
The value of their pension pot is also affected by the change in the value of their assets so they might have less money in retirement and even run out of money. Pensioners who transfer out of a defined benefit pension scheme have other pensions and investments or have a limited life expectancy.
Additionally, the current worrisome state of the economy due to COVID-19 has brought in a new wave of pension scams. The pensioners are highly vulnerable to pension scams because pensioners are struggling, and they are worried about the impact of the pandemic on the savings and pension accounts. The total number of pension fraud cases reached 2,100, with the fraudulent activity of over £5 million, since February 2020.
Therefore, it became necessary for the FCA to intervene and safeguard the interests of the pensioners. The measures and changes include steps to reduce conflicts of interest, support for advisors wanting to do the right thing, and support for pensioners who are considering transferring out of a defined benefit scheme or have transferred out already.
The shocking revelation was that about 47% of the employees received unsuitable advice, while 32 per cent had information gaps
The FCA has started investigations into 30 financial advisory firms that have given unreasonable defined benefit transfer advice to their customers. Although the suitability of advice has improved from 47 to 60 per cent from 2015 to 2018, yet the high number of cases of unsuitable advice and information gaps remain a matter of grave concern.
As a part of its investigation in 2017, the FCA reviewed 192 cases of pension transfer of British Steel employees. The shocking revelation was that about 47 per cent of the employees received unsuitable advice, while 32 per cent had information gaps. The watchdog investigates the case further and has written to over 4,000 pension scheme members to advise them on how to complain.
The recent rules and guidance on advice related to pension transfer apply to all the companies involved in advising customers on pension transfers. It also applies to providers of professional indemnity insurance, compliance consultants, and trustees and sponsoring employers of workplace pension schemes.
The new policies and guidelines are also relevant to consumer representative groups, members of pension schemes, administrators of pension schemes, trade bodies representing financial advisors, and managers of contract-based pension schemes.
The measures released by the FCA are expected to bring relief and support to the DB scheme pensioners, especially during the present times of economic uncertainty and financial instability. The occurrences of unsuitable advice and information gaps to meet the interests of the financial advisors are expected to reduce post the new rules and measures.
Sweeny Kamur is Finance Content Editor of Kensho Media
