Analysis: UK regulator decides against relaxing DB transfer rules
The UK regulator has abandoned plans to relax the rules governing defined benefit (DB) transfers in the face of ongoing concerns about the suitability of transfer advice.
On Monday, the Financial Conduct Authority (FCA) said it would maintain its current position that advisers should “start from the assumption that a DB pension transfer will be unsuitable”.
The regulator said it had seen high levels of unsuitable advice offered, particularly in the light of a review of advice offered to members of the British Steel Pension Scheme (BSPS). Of the approximately 8,000 transfers out of the BSPS, the FCA found that just under half had been inappropriately advised .
Earlier this year Andrew Bailey, chief executive of the FCA, wrote to parliament’s Work and Pensions Select Committee in response to concerns raised by its chair, Frank Field, that the regulator could be “sleepwalking into another huge mis-selling scandal”. Field had suggested that the FCA’s work on BSPS was “grossly inadequate”.
In his letter, Bailey noted that the regulator had already referred 14 cases for investigation as part of its ongoing supervisory work, adding: “Our work on BSPS is not finished.”
Pension freedoms, which allowed individuals over the age of 55 to take their pension savings as a lump sum, were introduced in the UK budget of 2014 by then-chancellor George Osborne and came into effect the following tax year.
Since then, more than £14bn (€16bn) has been cashed in, according to the UK tax authority, with a rise in the number of DB transfers in particular driven by the current low interest rate environment in the UK and high transfer values.
According to consultancy firm Hymans Robertson, four times as many DB members have opted for a transfer over the past six months compared with the six months up to the introduction of pension freedoms in April 2015.
However, questions have recently been raised as to whether transfer values have now peaked.
“With rising interest rates, and changing actuarial rates, it is possible that we could see the transfer rate tip after previous highs,” said Martin Tilley, director of pensions technical at Dentons Pension Management. “That’s not to say they’re going to dive but there is a strong possibility of them reducing.”
The message for individuals seeking to transfer out of a DB scheme was clear, Tilley added: “Sooner rather than later is the key.”
The FCA has emphasised that opting out of a DB scheme was not suitable for everyone. However, Tilley said that while the overwhelming majority of DB members should not transfer, a scheme paying out £10,000 a year might be meaningless for wealthy individuals who could find a better or more flexible retirement vehicle.
“If I’m a multi-millionaire, [£10,000 a year] is neither here nor there – I can afford to put it into another vehicle and do more things with it,” he said. “But if you… get to 65 and totally depend on the £10,000 from a DB scheme, then it is almost certainly a bad idea to take the risk.”
In a separate move this week, the FCA announced it would leave the current system for overseas pension transfers untouched. The advice requirement was “largely working”, the regulator said, although it flagged concerns that demand for pension transfer specialists was currently outstripping supply.