The consultation proposes the FCA’s Conduct of Business Sourcebook (COBS) pension transfer requirements will apply to all pension transfers, meaning pension transfers advice will be required to be carried out, or checked by a pension transfer specialist, regardless of when the transferred benefits are being crystallised, for funds over £30,000.
The legislation refers to transfers of ‘safeguarded benefits’, a new regulatory definition of benefits in DB schemes or other benefits such as guarantees or other promises in occupational or contract-based DC arrangements. The FCA wants the transfer advice requirements to apply to ‘pension conversions’ that include conversion of safeguarded benefits into flexible benefits within the same scheme – for example in future defined ambition schemes – and the payments of UFPLSs where there are flexible benefits.
While the FCA already regulates advice on transfers to personal pension schemes it does not currently regulate advice on transfers to occupational DC schemes. To address this gap in regulation, the Government is amending the RAO to make advising on conversions or transfers of safeguarded benefits to flexible benefits a specified activity, to be regulated by the FCA. This will bring advice on transfers from DB schemes to occupational DC schemes within the FCA’s remit.
The FCA says it wants to require advisers to have a Pension Transfer Specialist qualification for advice on all transfers from DB schemes to DC arrangements, regardless of when the transferred benefits are being crystallised.
It also propose requiring a transfer value analysis for advice on all transfers of safeguarded benefits to flexible benefits, including advice on transfers from DB to occupational DC schemes.
The consultation paper cites the Treasury’s September impact assessment, which predicted that with CETVs paying out at 80 per cent, it would be rational for 7.6 per cent of the 120,000 individuals approaching retirement to transfer, working out at 9,000 transfers a year. The FCA paper adds that this figure does not include individuals making irrational decisions to transfer because they are attracted to ready cash. The FCA says it has no way of determining the scale of these ‘irrational’ consumers, and estimates between 2.5 and 5 per cent of consumers could be tempted on this basis, meaning a further 3,000 to 6,000 transferees per year. It’s cost/benefit analysis says 7,000 advisers currently have qualifications to offer transfer advice and estimates a further 45 advisers would be needed.
Hargreaves Lansdown head of research Tom McPhail says: “This consultation comes late in the day, given that the new regime is only a month away now, however this is a reflection of the very tight timescale of reform imposed by the government. The impact assessment supplied by the Treasury projects demand from 35,000 individuals seeking advice on transfers from Defined Benefit to Defined Contribution pensions. This looks optimistically low to us; our research has indicated that up to 500,000 people are actively considering transferring across, of whom more than half wish to do so before they reach retirement.
“For many people the Guaranteed Annuity Rate is a valuable but slightly unwelcome benefit. This is because it may not meet their precise retirement income requirements; it could for example only be available on a single life basis when the policyholder would prefer joint life. Investors may be able to negotiate a higher transfer value from the insurer; something which the insurer may agree to just to get the GAR off their books.
“It also makes sense to bring transfers to occupational DC schemes into the advice regime. If it walks like a duck and quacks like a duck, it probably is one; DC schemes carry the same effective risk as transfers to money purchase personal pensions and so should be treated the same.”
