FCA DB transfer rules may not provide expected consumer protection - LCP

New Financial Conduct Authority (FCA) rules requiring the benchmarking of defined benefit (DB) transfers against a workplace pension may not provide the consumer protection intended, Lane Clark and Peacock (LCP) has warned.

The new requirements, to be introduced from 1 October, would see independent financial advisers (IFAs) who are recommending a transfer out of a DB scheme needing to benchmark the proposed destination for the funds against a low-cost workplace pension.

However, LCP has warned that many of these workplace pensions are designed for regular contributions from automatic enrolment, rather than a large transfer in from a DB scheme member, who will likely be looking for a "wider range of investments and more tailored post-retirement options".

Furthermore, in a survey of 13 master trusts, LCP found that the largest master trust by membership, Nest, did not accept DB transfers at all, whilst others said that they generally did accept transfers in, but only where the transferring member already had a policy with a master trust.

Other standard requirements amongst the master trusts included evidence that the member had received advise from a qualified adviser, with some schemes specifying that this advice must be in favour of a transfer.

A number of schemes also required confirmation that any issues relating to member’s specific DB rights, such as equalisation of GMPs, had been resolved before a transfer could take place.

The firm explained that the FCA increasingly expects DB transfers to be suitable only for those approaching retirement, some of whom may not be members of a workplace pension scheme.

LCP emphasised that this would allow an adviser to therefore explain that this comparative is not relevant to a client's particular circumstances.

Furthermore, the firm warned that the survey response on post-retirement options could “give cause for concern" about the suitability of benchmarking against transferring into a master trust, emphasising that there are limited options offered by master trusts.

In particular, LCP found that "even relatively basic features", such as a monthly income in drawdown, were not offered by all master trusts.

One of the largest master trusts stated that it did not currently have any ‘at retirement’ options other than transferring to another provider or cashing out under ‘small pot’ rules.

However, several schemes discussed plans to ‘upgrade’ retirement offers or review their post-retirement options, which the firm noted may be in recognition that this has not been a priority area in the design of master trusts so far.

The FCA has previously raised concerns over some of the products commonly used for transfers, such as self invested personal pensions (SIPPs), arguing that these may represent poor value, with the new requirements expected to put pressure on advisers to justify these charges, and drive them down.

However, the survey revealed that some schemes would not necessarily offer lower charges, even if a large sum was transferred in.

LCP noted that in contrast, an individual investor might be able to secure lower charges on an investment product if investing a relatively large sum.

LCP principal, Philp Audaer, explained: “Master trusts were generally designed to be a mass-market workplace pension solution for companies wishing to comply with automatic enrolment legislation, as opposed to receiving large transfers in which reflect the value of years of past service in a DB occupational pension."

He emphasised that the focus of most master trusts has been on the accumulation phase, whilst someone transferring in a large DB pension may be looking for a wider range of investments and "more tailored" post-retirement options.

Audaer continued: “Although the market is developing, relatively few master trusts currently offer this degree of equivalence.

“As a result, IFAs will often find it relatively easy to meet the FCA’s requirement to benchmark against a master trust and make a convincing case in support of their preferred investment option.

“This benchmarking is therefore unlikely to provide the degree of consumer protection envisaged by the FCA”.

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