Alongside its new rules which are designed to improve the DB transfer advice market, the FCA has published draft guidance which seeks to explain how firms can comply with the FCA’s new and existing rules relating to pension transfer advice.
The guidance also sets out the FCA’s views on the support trustees and employers can give to their members/employees without needing to authorised by the FCA. The final guidance is due to be published in the first quarter of 2021 and, if it remains unchanged, it is likely to restrict the support and information that trustees and employers can provide to their members in relation to DB to DC transfers.
What does the draft guidance say?
Annex 2 of the draft guidance confirms that trustees and employers can “give information to members that presents a balanced and factual view of the general advantages and disadvantages of keeping safeguarded benefits or transferring/converting those benefits”. It also makes clear that, “to avoid giving advice, employers and trustees should not give information that suggests whether or not a member should transfer/convert their safeguarded benefits into flexible benefits”.
In this context, the draft guidance states that:
- trustees should not give information to individual members based on their personal circumstances
- where an employer or trustee gives scheme members illustrative figures that compare the outcomes a member might get if they remain in their DB scheme or take a transfer, this is likely to constitute regulated advice or an inducement, as it might steer a member towards a specific course of action, and
- if an employer or trustee provides a transfer value comparator (TVC), in accordance with the FCA’s rules, they should consider whether they are doing it by way of business and need FCA authorisation (note: a TVC is a comparison of the cash equivalent transfer value offered by the scheme versus the cost of buying the same income via an annuity at retirement).
It has become increasingly common for trustees to include transfer values in retirement packs. However, if the final guidance is unchanged on these points, trustees will need to reconsider whether to continue providing unsolicited transfer values in this way.
Schemes may also provide members with TVCs or access to modellers which show the relative value of an individual’s DB pension compared with taking a transfer. Whilst it could be argued that trustees who provide TVCs or similar modellers are not doing so “in the course of business”, the interpretation of this test is very uncertain and so, if the FCA’s position remains the same, there is a risk that the provision of this information by trustees may constitute regulated advice.
Giving regulated advice without obtaining FCA authorisation carries financial and reputational risks. It is also a criminal offence. Therefore, trustees will need to review their approach to providing support and information to members in relation to DB transfers in light of the FCA’s final guidance.
Concerns have been raised about the position that the FCA has adopted on these matters, as providing tailored information can help members to make informed decisions about their retirement. However, this reflects the FCA’s concerns about DB transfers and its desire to reduce the number of transfers that are taking place.
The FCA’s guidance on transfer advice could restrict the information that trustees and employers can make available to their members/employees about DB transfers, which risks undermining informed decision-making. It is important that trustees and employers review the information that they provide in relation to DB transfers in light of the FCA’s final guidance.