Financial advisers who helped employees transfer out of a defined benefit (DB), or final salary, pension scheme could be forced to contact their clients and pay redress, following a review by the Financial Conduct Authority (FCA).
The review is timely, given the pension changes announced in this year's Budget. Some commentators believe more people approaching retirement could opt to transfer out of their DB schemes in order to access their pension cash from age 55.
When the City watchdog scrutinised a sample of 300 cases between 2008 and 2012 where an adviser facilitated a transfer out of a DB pension scheme, they found that only 52 per cent of those were deemed a suitable move. Just over one-third were deemed unsuitable and the remaining cases were neither clearly suitable or demonstrably unsuitable.
areas of failure
The sources of bad advice included, among other things, the use of inadequately customised templates, failure to determine what level of risk the customer was willing and able to take, and failure to consider the client's wider circumstances. Fund recommendations that didn't match the client's risk profile, and the use of default receiving schemes, were other areas of failure.
The FCA points out that it found no evidence of poor client outcomes in about two-thirds of cases.
Shockingly, the regulator found advisers had not properly revealed and explained all necessary information in almost three-quarters of cases. This could include incomplete record-keeping or poorly explaining the risks involved in the transfer.
In transferring from a DB to a defined contribution (DC) scheme, the individual takes on the risk themselves, rather than the scheme as a whole bearing the risk.
Clive Adamson, director of supervision at the FCA, says: '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 service.'
HM Treasury has also proposed that savers must take impartial and regulated financial advice before completing a pension transfer out of a DB scheme.
At Standard Life, Jamie Jenkins, head of workplace strategy, comments: 'Standard Life is pleased that the government has decided not to ban transfers from funded DB to DC pension schemes.' Jenkins believes the mandatory requirement to seek professional advice 'will safeguard the interests of DB scheme members and trustees'.
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