In recent months, the press has focussed increasingly on record pension transfer values and an apparent surge in the number of people looking to cash in their defined benefit (DB) pensions. The Pensions Regulator (TPR) estimates that approximately 80,000 transfers occurred from April 2016 to March 2017. Our experience with clients suggests that there has, undoubtedly, been an increase in transfer activity. That said, and although it is early days, when the emergent trend is viewed against the overall number of DB scheme members, a somewhat different perspective emerges, namely that, so far at least, the vast majority of people are holding on to their DB pensions.

The FCA recognises that pension freedoms and historically high transfer values may lead more people to consider transferring their DB pensions; and, further, that transferring may now be appropriate for some where previously it was not. It has therefore proposed changes to its rules to enhance the quality of advice to consumers. Importantly, the FCA is also proposing to alter the guidance for advisors to assume unsuitability when advising on transfers.

Notwithstanding these proposed changes, the advice process is likely, in most cases, to continue to encourage retention of DB pension benefits. However, given the FCA’s altered stance on the presumption of unsuitability, we expect that advisors will be more confident in recommending transfers where the customer’s individual circumstances provide a strong case. Such circumstances might apply, for example, where the customer has other adequate sources of retirement income or an impaired life expectancy.

Overall, whilst the trend is still crystallising, we expect that these changes, reinforced with increasing consumer awareness of the potential to transfer, will lead to further material increases in the overall number of pension transfers.

The FCA has emphasised that its proposals do not represent a softening either of its general position on transfers - namely that most individuals would be best advised to keep DB pensions and other safeguarded benefits - or of its expectation that advisors must be able to demonstrate that a transfer is in the best interests of their client. Given the increased regulatory scrutiny of pension transfer advice, we recommend that firms lose no time in reviewing the FCA’s proposals in detail to identify any necessary changes to their approach and to satisfy themselves that they are providing advice that meets the latest regulatory expectations.

Transfer numbers - tidal wave or trickle?

Though the TPR’s estimate of 80,000 transfers may seem a large number, to put it into some context, there are approximately 6.5 million (deferred and active)1 members of private sector DB schemes in the UK. The number of transfers estimated by TPR thus represents approximately 1.2% of this total.

This is the only period TPR holds data for, preventing straightforward comparisons with the pre-pension freedoms levels. It is also challenging to calibrate the rise in pension transfers since, prior to the introduction of pension freedoms and the rise in transfer values, the rationale for transferring was not as strong.

Nevertheless, the numbers would suggest that the vast majority of people are, so far, holding on to their DB pensions. This chimes with recent research from Prudential which indicates that people with final salary schemes are generally, and understandably, cautious about giving them up.

Improving the advice process

Since the introduction of pension freedoms, decisions on converting or transferring safeguarded benefits have become increasingly complex. The FCA estimates that 95% of advice transactions on the transfer of safeguarded benefits already include a personal recommendation. However, to ensure that consumers are in a position to make properly informed decisions about transfers, the FCA is proposing a number of changes to the advice process. These changes - particularly the introduction of a new comparator to illustrate the value of the benefits being given up - should encourage the retention of what remains, for the majority, a valuable benefit.

The FCA’s proposed changes include:

  • Personal Recommendations - All advice on the transfer and conversion of safeguarded benefits will need to include a personal recommendation. The FCA states that the complexities associated with the transfer of safeguarded benefits mean that, in order for advice to be meaningful, it must look at a client’s overall circumstances and provide a specific recommendation. The FCA also proposes additional guidance on assessing suitability.
  • Replacing the TVA – The FCA was concerned that advisors placed too much emphasis on the transfer values analysis (TVA). It is therefore proposing to replace it with an overarching requirement to undertake appropriate analysis of the client’s options. This ‘appropriate pension transfer analysis’ (APTA) is intended to be an integral part of the client’s suitability assessment and will be based on the individual’s circumstances, needs and objectives.
  • Introduction of a new comparator - as part of the APTA, the FCA proposes to introduce a comparator that provides consumers with information on the value of the benefits being given up rather than focusing on critical yield - a concept which, according to the FCA, is not widely understood by consumers and has become distorted as alternative options to annuities have developed.2

Clarity for advisors

The FCA acknowledges that the introduction of pension freedoms has altered the options available and that, for some consumers, a transfer may now be suitable where previously it might not have been. It is therefore proposing to drop its existing guidance that advisors should start with the assumption that a transfer would be unsuitable in favour of a neutral starting position. We expect this change in the FCA’s stance to give advisors greater confidence to recommend transfers and, consequently, to encourage uptake amongst people who have a strong rationale for transferring. Examples of such a rationale include where life expectancy is limited; where an individual has other adequate sources of retirement income; where the individual may benefit from the greater flexibility afforded by other pension products; to enable more efficient inheritance tax planning; or where there are concerns about the scheme’s financial strength. On this last point, however, which appears to have been an important driver in some recent cases, we highlight the FCA’s guidance that advice should not be provided in this area unless the advisor is an expert in assessing company strength.

Increased public awareness

The Payment Protection Insurance (PPI) mis-selling episode highlights how increased public awareness of an issue can spur people to take action. If headlines about high transfer values and the potential benefits of transferring continue, inevitably more people will be encouraged to explore this option, particularly as some people appear to be mistrustful of pensions (as highlighted by the FCA’s recent Retirement Outcomes Review Interim Report). This may drive up the number of transfers as well as creating a challenge for advisors who are confronted with clients who insist on a transfer even if advised it is not in their best interests.

The FCA is currently consulting on guidance to increase advisors’ confidence in dealing with such ‘insistent clients’ as part of the Financial Advice Market Review. In the meantime, the FCA is clear that, provided the implications of a transfer are properly and clearly explained to a client, its rules “do not prevent them [clients] from proceeding if they want”.

Transfer values

In practice, one of the biggest influences on an individual’s decision is likely to be the size of the transfer sum offered by the scheme. The past few years have been challenging for pension schemes with low nominal and real interest rates and long term bond yields driving up the valuation of scheme liabilities and hence the size of transfer values. Enhanced offers from individual schemes looking to de-risk may also have increased transfer valuations in some cases.

It is possible that transfer volumes have reached a high water mark and will fall back should interest rates and bond yields rise on a sustained basis. Nevertheless, we expect that transfer values will need to fall materially further before this has any significant impact on the number of transfers. Indeed, in the short term, a small fall in transfer values may have the effect of increasing transfers as people act now rather than risk a further drop in values.

Next steps

The FCA’s consultation closes on 21 September 2017 and new rules are expected in early 2018. Given the increased regulatory scrutiny this area is attracting, we recommend that firms:

  1. review the FCA’s proposals to identify where they may need to make changes to their advice processes and customer communications; and
  2. review their pension transfer advice to ensure that it meets regulatory expectations in areas such as the suitability of advice, the information gathered and considered, and the needs and objectives of the customer.

1The DWP estimates that there are approximately 11 million members of private sector DB schemes. Of these, 40% are pensioner members. These have been excluded on the basis that individuals are not generally permitted to transfer once their pension is in payment.

2The requirement to undertake an APTA, including a TVC, will apply to all pension transfers and conversions of safeguarded benefits except where the only safeguarded benefit is a Guaranteed Annuity Rate (GAR).


Andrew Bulley

Andrew Bulley - Partner, Centre for Regulatory Strategy, Deloitte

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision.  Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”).  In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

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Chan Cindy

Cindy Chan - Partner, Risk Advisory, Deloitte

Cindy Chan has over 19 years of financial services consulting and audit experience. She has extensive experience in supporting firms in regulatory risk assurance reviews and conduct risk projects including complaints handling, product development and governance, sales and suitability assurance, as well as Section 166 Skilled Person reviews and enforcement cases.

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Orla Hurstblog

Orla Hurst - Senior Manager, Centre for Regulatory Strategy, Deloitte

Orla focuses on Conduct Regulation. She has worked with a number of financial services firms helping them to understand the strategic and operational implications of conduct regulation. She joined Deloitte in June 2017.

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