FCA expands probe into health of beleaguered pensions transfer market

Phase Four of the Financial Conduct Authority’s (FCA) multi-firm supervision exercise on defined benefits (DB) pensions transfers is now in progress, with questionnaires being sent to every firm with permission to advise on these pension transfers.

Previous phases going back to October 2015 saw the regulator review the practices of various firms and identify problems. As a result, the FCA has already contacted 68 firms and deemed fewer than half the DB transfers where the advisor recommended a transfer to be suitable. Eight firms have already varied their permissions to advise as a result.

A further 3,026 firms are now set to be contacted by the FCA via the questionnaire, which is due to be returned by the end of 2018.

Risky business

Due to the value of DB pensions, which pay secure income for life, the FCA deems the transfer out of DB schemes to other schemes to be high risk. It advises investors to seek regulated specialist financial advice before making a transfer and, if the pension is worth £30,000 or more, requires such advice to be taken.

According to the FCA’s Code of Business Sourcebook, firms advising on DB pensions transfers should, in particular:

  • Consider the assets in which an investor’s funds will be invested and the specific receiving scheme
  • Take into account the characteristics of the assets in the receiving scheme
  • Explain the rates of return that would have to be achieved to replicate the benefits being given up
  • Illustrate the likely rate of return on the new investment, taking into account the associated risks and costs of the transfer.

The default position currently adopted by the FCA is that, in most cases, investors are likely to be worse off if they transfer out of a DB scheme, even if their employer gives them an incentive to leave.

This is because the cash value may be less than the value of the DB payments and the investor’s eventual pension payments will depend on the performance of the new scheme; there is, therefore, the risk that the scheme will not deliver the anticipated rate of return.

In January 2018, the Financial Ombudsman Service reported that the number of complaints about self-invested personal pensions (SIPPs) - into which DB pensions are commonly transferred - had, up to the end of the third quarter for this financial year, already exceeded the number received for the whole of the 2016 to 2017 period. Many claims relate to poor advice given by firms to transfer out of pension savings into SIPPS, usually with a view to investing them in illiquid and risky unregulated products, which naturally increases the risk of the investment.

Mis-selling claims and compensation

High profile examples of alleged mis-selling of DB pensions have increased the scrutiny on advisors executing these high risk transfers.

Perhaps best known is the mis-selling scandal involving British Steel pension scheme members, allegedly targeted by financial advisers after Tata Steel UK was allowed to offload its retirement fund. Members had to decide what to do with their pension funds after the scheme was separated from Tata. Since March 2017, this has amounted to some 2,600 pension transfers, valued at £1.1 billion. At least two advice firms have already gone into liquidation as a result of claims against them, and steel-workers have since instigated legal proceedings against “all parties involved” in the process.

Comment

It remains to be seen what sanctions the FCA will impose on the additional firms, in what is now a full market investigation. Regardless of the action taken, the publicity of the review is likely to increase the number of claims made, partly due to claims companies on the look-out for the next Payment Protection Insurance (PPI) mis-selling scandal.

This could be disastrous for the many firms unable to meet the excess liabilities on their professional indemnity insurance cover and/or regulatory fines. If forced into default as a result, the firms would be unable to pay liabilities generated by claims against them and it would fall to the Financial Services Compensation Scheme (FSCS) to pick up successful claims against the insolvent advisors.

The FSCS has already blamed a rise in DB pension transfer claims as the source of a £52 million increase in its levy on life and pensions advisers (as a result of it having to cover claims against insolvent advisors). It announced a £407 million levy on firms for 2018/19; £71 million more than forecast in its January budget.

With such large amounts of money at stake we can expect the FSCS, which takes an assignment of the investor’s rights when it pays compensation, to pursue claims against other entities connected with the provision of the receiving scheme, such as pension operators, in an attempt to recover some market losses.  of the receiving scheme, such as pension operators, in an attempt to recover some market losses.

Read other items in the London Market Brief - October 2018

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