Out-Law News 2 min. read

Advising on transfers between defined benefit and defined contribution pension schemes now regulated


Advising on the transfer of savings from defined benefit pension schemes to defined contribution schemes is now a regulated activity in the UK.

The Financial Conduct Authority (FCA) outlined new rules governing the provision of advice on pension transfers (55-page / 312KB PDF) on Monday.

Under the new regime, which came into immediate effect, 'pension transfer specialists' would need to be involved in advising defined benefit (DB) pension scheme members where those people intend to shift their safeguarded pension benefits into defined contribution (DC) schemes. Safeguarded pension benefits are benefits other than money purchase or cash balance benefits, and are usually backed by employer guarantees.

Where specialist advice is required, financial advisory businesses would need to ensure pension transfer specialists either advised the savers on a DB to DC pension transfer themselves or had checked the advice given by a non-specialist in the business.  Advice from a pension transfer specialist would not need to be provided where "the only safeguarded benefit is a guaranteed annuity rate", according to the new rules. No advice is required where the value of safeguarded benefits that would be transferred is less than £30,000.

The pension transfer specialist must be "independent of the employer or trustees/manager of a scheme" but can offer their advice "on either an independent or restricted advice basis", the FCA said.

When considering the suitability of pension transfers, advisors'sdefault position it is that the transfer from DB to DC "will not be suitable".  with reference to the saver's attitude to risk, an advisor should "only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client's best interests", according to the new rules.

Financial advisors must "compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme or other pension scheme with safeguarded benefits with the benefits afforded by a personal pension scheme, stakeholder pension scheme or other pension scheme with flexible benefits, before it advises a retail client to transfer out of a defined benefits pension scheme or other pension scheme with safeguarded benefits".

The advisors must give the DB pension scheme savers a copy of the comparison they made and draw their attention to "the factors that do and do not support the firm's advice".

If savers seeking a DB to DC pensions scheme transfer intend to immediately access savings following that transfer or are otherwise at "normal retirement age under the rules of the ceding scheme" then the comparisons between the two pension schemes do not need to be made.

The rule changes have been designed to ensure that savers seeking to take advantage of the new flexibilities available to DC pension scheme members since April are properly protected.

The FCA said that it will not immediately require financial advisors to obtain new qualifications to qualify as 'pension transfer specialists' but that it would stiffen the examination process in future.

"Inevitably, the new flexibilities will require us to update the FCA’s exam standards, but we will do this once we have a greater understanding of how the market has changed," the FCA said. "New secondary regulations already require trustees and managers of schemes to inform a member seeking to transfer that the member must provide a letter within three months confirming that they have taken advice. We would expect advisory firms to take notice of this three month requirement. We do not see the need to impose additional requirements on advisory firms in this regard."

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