New evidence of bad advice on pension transfers
UK - The Financial Services Authority has uncovered fresh evidence of pension transfer mis-selling which indicates some occupational pension members may have been wrongly advised to shift out of schemes in the wake of A-Day.
The financial services regulator conducted a sample review of 30 UK firms who conducted transfers from all types of pension schemes into personal pensions and self-invested personal pensions (SIPPs) since A-day tax regime changes in April 2006, and found in 16% of 500 cases reviewed members were given "unsuitable advice".
The number investigated was designed to represent approximately 10% of pension-switching sales since A-Day, though the firms were targeted because they were dong "significant levels of pension-switching business".
The FSA stressed most of those cases were individual personal pension transfers, however the issues raised affect occupational pension members transfers too as it appears some financial advisers were overstating the potential investment return as transfers were priced against moves into cash funds - strategies which are likely to carry substantially lower costs yet unlikely to meet the 5%, 7% and 9% projected returns advisers must stipulate in projections.
More specifically, the investigation found 79% of switches into PPPs or SIPPs involved extra products costs "without good reason", stated the FSA review, while in 40% of cases the funds recommended were not suitable to the customer's attitude to risk and personal circumstances, and in 14% of cases the switch involved loss of benefits from the ceding scheme - for example guaranteed annuity rates.
One of the major concerns raised at A-Day, when rules were relaxed to allow a wider number of individuals to invest in SIPPs, for example, was people would be persuaded to move into schemes where they were unlikely to ever use all of the apparent benefits of the new scheme but would pay a higher fee in the process.
Some of the claims being made by financial adviser and pension provider firms at A-Day was switching to a SIPP would provide greater investment flexibility, to give the flexibility of a drawdown option or for reasons of fund performance.
Yet there was no evidence these options were needed, said the FSA.
On the back of its revelations, the FSA will conduct further investigations next year and is writing to 4,500 companies who advise on pension transfers to remind them of their duties, as well as warning some companies face "enforcement investigation as a result of significant failures during the review" while others will be required to make minor amendments to their processes.
"Switching into personal pensions and SIPPs from existing arrangements can be an appropriate move for many people, but this is a complex area of business where consumers rely heavily upon advisers," said Dan Waters, director of retail policy and condict risk at the FSA.
"We are concerned at the variable results across firms. As a result, we are taking targeted action in relation to firms giving personal switching advice to deal with the risk of unsuitable advice on past and future sales, and to press all firms to meet the standards we expect."