Read about our work in defined benefit (DB) transfers to date and how we continue to supervise this area.
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Defined benefit pension schemes provide members with a guaranteed income in retirement, which we consider important and valuable benefits for members of these schemes. Advice on whether to transfer a DB pension is complex and requires specialist resources. Since the 2015 pension freedoms, advice in this area has been mandatory for any transfer with a value over £30,000.
DB advice market - new entrant applications
For most consumers it’s not in their best interests to transfer out of a Defined Benefit (DB) pension. Where a consumer seeks advice to transfer, firms must give suitable advice that is personalised to their needs and situation. If advice is unsuitable, consumers can suffer harm. Some may end up with less money in retirement, with no guarantee about the amount of income available at retirement. If we find a firm is not meeting our expectations, we will take action.
Given the high risk of consumer harm associated with unsuitable advice to transfer, we thoroughly check applications from new entrants to the DB advice market. We test the robustness of firms’ systems and controls and we ensure the competence of individuals seeking approval. Particularly for pension transfer specialists, or those who previously held oversight roles such as Senior Manager Functions. We will apply this approach at all gateway entry points, including for new firm or individual authorisations, variations of permission, appointment of Appointed Representatives (ARs), or changes in controllers.
Our assessment involves checking a firm’s or individual's past conduct and involvement in advising on pension transfers. We will review the intelligence we hold on firms and individuals who have previously provided pension transfer advice. Firms applying for new pension transfer permissions will need to provide details regarding the suitability of their past advice, their past conversion rates, particularly where dealing with insistent clients, and any past complaints.
If authorised firms are applying for individuals or appointing ARs to join their firm, they will need to carry out thorough due diligence on their past DB activity before submitting an application. The Senior Manager with accountability for the fitness and propriety of those holding approved functions should have oversight of the due diligence undertaken before putting candidates forward for approval.
Firms will need to demonstrate how the DB pension transfer advice and associated services fit with their overall business model and target market. They will also need to provide evidence that they are able to secure adequate professional indemnity insurance cover. We will scrutinise firms’ financial and non-financial resources in accordance with the threshold conditions[1], to ensure that they have a viable business model.
As part of our assessment and in conjunction with our strategy on phoenixing[2], we will also identify and stop firms and individuals seeking to avoid past conduct liability claims by reinventing themselves, either as different firms, or by joining already authorised firms.
Our approach intends to minimise consumer harm. We might request additional evidence to demonstrate the suitability of both firms and individuals to conduct DB pension transfer business.
Defined Benefit Advice Assessment Tool (DBAAT)
We have developed a Defined Benefit Advice Assessment Tool[3] (DBAAT) to help firms understand our file review methodology.
Supervising DB transfers
We published updates on our work in 2017[4], 2018[5] and June 2020[6]. We have conducted specific work into advice provided to members of the British Steel Pension Scheme[7].
Our supervisory work has also been supported by updates to our rules and guidance including PS18/6[8], PS18/20[9], PS20/6[10] and FG21/3[11], our guidance on advising pension transfers.
We have taken significant action where we consider that firms have not met the standards of advice and behaviour expected for financial advice. Where we suspect serious misconduct we have opened enforcement investigations.
Focusing on the most active firms
The DB transfer market is significant in terms of both the number of people and monetary values involved. In 2018, we issued a data request to all firms with pension transfer advice permissions. Our high-level findings are published in our market-wide data results reviewing DB pension transfers[12]. This data enabled us to build a more comprehensive picture of the pension transfer advice market: advice was provided on £82.8bn of transfers, with 162,047 members being recommended to transfer their pension.
This data gives us the information we need to focus our continuing supervision of firms and drive up the quality of advice. By focusing on firms where the risk of poor practice is highest, we can prevent consumer harm in future. We can do this by working with the firm, or stopping it carrying out activities until our concerns are resolved. It may also involve more formal action if that is required.
We are also working to improve understanding of the DB pension transfer market. This will include working with firms, market-wide campaigns, and industry seminars and meetings with key people and organisations.
Our rules and guidance provide a framework through which suitable advice can be given, however we will not hesitate to take action where firms have not heeded our messages and are presenting harm to consumers.
Pension transfer permissions
The Handbook definition of pension transfer changed from 1 October 2020, and refers to transfers of safeguarded benefits to flexible benefits in a different scheme, plus some transfers of safeguarded benefits to other safeguarded benefits. As a result, the regulated activity of advising on pension transfers and opt-outs now covers only transfers of this type.
The non-standard limitation also changed to reflect this and firms should use this revised wording:
- short description: limited pension transfer activity
- long description: This activity is limited to the provision of advice on the conversion or transfer of benefits from pension policies with a guaranteed annuity rate
Regulated advice under FSMA on transfers from defined contribution occupational schemes without safeguarded benefits is now covered by the activity of advising on investments (except on pension transfers and opt-outs).
See PS20/6[10] and the Handbook glossary for definitions of pension transfer[13] and guaranteed annuity rate[14].