Out-Law News 3 min. read
06 Mar 2015, 5:31 pm
The FCA intends to bring advice on transfers of 'safeguarded' benefits out of DB schemes into DC schemes into its regulatory remit from June 2015 in order to ensure that savers seeking to take advantage of the new flexibilities available to DC pension scheme members from April are properly protected. Safeguarded pension benefits are benefits other than money purchase or cash balance benefits, and are usually backed by employer guarantees.
Christopher Woolard, the FCA's director of strategy and competition, said that the changes would "ensure that those who are considering moving away to other arrangements are fully aware of the potential benefits they are giving up". "In many cases transferring from DB to DC may not be in the member's best interests," he said.
From April 2015, members of DC pension schemes will be able to access their savings in any way that they wish once they turn 55, without facing heavy tax penalties or necessarily having to buy an annuity. This new freedom will be backed by a right to guaranteed free and impartial guidance at the point of retirement, although the guidance provided through the 'Pension Wise' service will not recommend specific steps, products or providers in the same way as regulated financial advice.
Members of private sector and funded public sector DB schemes will be allowed to transfer pensions not yet in payment to DC schemes in order to take advantage of the new freedoms. However, both the FCA and the Pensions Regulator have said that it may not always be in a DB pension scheme member's best interests to do so. The new rules that the FCA is consulting on would make advising on the conversion or transfer of safeguarded pension benefits into flexible benefits a regulated activity, reflecting the existing position for transfers from DB schemes to personal pensions, such as self-invested personal pensions (SIPPs). The FCA does not currently regulate DB to DC transfers, although it regulates the schemes themselves.
The FCA is also proposing changes to its Conduct of Business Sourcebook (COBS) which would require those advising on pension transfers to hold the same pension transfer specialist qualification that must be held by those advising on DB to personal pension transfers. The new advice requirements would apply regardless of when the transfer benefits were crystallised. They would also apply to 'conversions' of guaranteed benefits to flexible benefits within the same scheme; something which the FCA expects to become more common once new 'defined ambition' pensions become available.
According to FCA estimates, an additional 9,000 DB scheme members per year could transfer their pensions to a more flexible arrangement. Of these, between 3,000 and 6,000 could be doing so for "irrational" reasons which, if the transfers took place, could lead to material consumer detriment. "Rational" reasons for a transfer could include to pay off debts or to take advantage of more appropriate investment opportunities, the FCA said.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com said that the proposed changes would make it more difficult for people to transfer from a DB pension scheme to a DC scheme. In particular, the requirement for a specific qualification would "limit the number of independent financial advisers who will be able to provide advice, and will therefore make that advice more expensive", he said.
"It is clear that the FCA fears that members will be tempted by the new freedoms available from 6 April 2015 in relation to DC schemes to transfer out of DB schemes, even though this means losing out on the guarantees that a DB scheme offers," he said. "This ties in with the view of the Pensions Regulator, whose recently-published draft guidance said that it was likely to be in the best financial interests of 'the majority of members' to remain in their DB scheme'."
"Both the FCA and the Pensions Regulator are keen to stem the potential number of future complaints from members who decide to transfer from a DB scheme to a DC scheme, and end up losing out," he said.
The FCA is consulting on its new rules until 15 April 2015 and intends to introduce them in June.