FCA issues new guidance on UK DB pension scheme transfers

The FCA urged pension providers to be vigilant when advising consumers on pension transfers, particularly those with defined benefit (DB) schemes who may exhibit characteristics of vulnerability. The new guidelines are part of the FCA's broader Consumer Duty initiative, which seeks to enhance customer protections and ensure firms prioritise the best interests of their clients.

Financial services expert Jonathan Cavill of Pinsent Masons said: “The regulator’s expectations here are not new, building on previous guidance on vulnerable consumers and ‘Treating Customers Fairly’, and the detailed guidance the FCA has produced on DB pension transfers specifically.”

“But alongside the new Consumer Duty-related rules for the treatment of those customers who are in vulnerable circumstances, this new transfer guidance renews the FCA’s focus on the high standards the FCA expects in this area, and clearly sets out how firms should be alert to potential indicators of consumer vulnerability.”

DB pension schemes offer very valuable retirement benefits, guaranteed for life, and often contain associated survivor benefits for members’ loved ones. In DB schemes, the employer takes on the risk that the assets are insufficient to pay out the promised benefits and is required to fund any potential shortfall. If the employer goes bankrupt, the Pension Protection Fund offers a safety net to its DB pension scheme members and provides financial compensation.

The FCA’s focus on DB pensions has heightened in recent years, such as in relation to a high level of unsuitable DB to defined contribution (DC) transfers by approximately 8,000 BSPS members – with transfers collectively worth almost £2.8 billion.

Concerns were later raised about the suitability of these transfers, prompting the FCA to impose two fines, totalling £3.7 million, and banning several individuals from providing advice in relation to pension transfers, amid other enforcement action. The regulator also set up a redress scheme for BSPS members who had been unsuitably advised and has published guidance on its expectations for DB pension transfers more generally.

This latest guidance highlights several scenarios in which DB scheme members might be considered vulnerable, including if they are concerned about the financial stability of their DB scheme or their sponsoring employer, or if they are experiencing significant financial distress due to the rising cost of living.

The regulator warned that consumers facing these challenges are also more susceptible to scams or fraudulent activity. Warning signs of vulnerability include overconfidence despite limited knowledge of pensions or investments, personal life distractions, financial dissatisfaction, cognitive decline, social isolation or loneliness, and heightened agitation when arranging pension transfers.

The FCA told firms to mitigate the risk of consumers in vulnerable circumstances coming to financial harm by enhancing staff training and improving controls. They should also clearly and fairly explain how DB and DC schemes can assist consumers with characteristics of vulnerability. It said they should also consider referring customers in financial distress to organisations like MoneyHelper, instead of offering immediate transfer advice.

Pension regulation expert Tom Barton of Pinsent Masons said: “The advice piece is critical to helping DB scheme members understand what they are giving up, what they are gaining and whether it is right for them and their loved one. Getting that advice piece right is also a vital part of risk management for firms delivering that advice, to guard against the kinds of claims, complaints and reputational damage seen recently in the British Steel case.”

Barton added: “There are various reasons to transfer away from DB pension schemes, especially now that ‘Freedom & Choice’ rules gives greater flexibility to choose a retirement solution that matches very individualised needs. Also, the DC personal pension market which members generally transfer to is highly regulated and comes with its own safety net in the form of the Financial Services Compensation Scheme (FSCS).”

“However, member outcomes from a DC scheme will depend on the vagaries of the markets from time to time – and the members bear that investment risk throughout retirement, over which period their ability to manage investment decisions can often decline sharply,” he said.

The guidance also includes several examples of good and bad consumer outcomes, which Cavill said indicated that the FCA will be “actively looking” to check DB pension transfer firms are implementing the Consumer Duty in their advice. “The FCA has previously taken firm action against actors in this area who the regulator thinks could do better, such as in relation to advice given to vulnerable ex-BSPS members,” Cavill said.

He added: “DB pension transfer advice firms should be in no doubt that the FCA will take similar action against firms which the regulator considers have not complied with its expectations, rules, and this related guidance. Firms also need to consider the duty in customer complaints they receive, and the Financial Ombudsman Service will be able to look at the duty in complaints for conduct.”

In one example of a bad outcome, the regulator said a firm failed to identify a relatively young customer who was facing bankruptcy as vulnerable. The firm then transferred his pension to a self-invested personal pension (SIPP) with high-risk investments without considering whether that action was suitable – especially given that the customer could not access the pension for more than a decade. 

Cavill noted that the guidance itself does not offer instruction to pension providers, such as SIPP providers, who receive DB pension transfers from customers who have been unsuitably advised. He added: “The FCA’s letter to SIPP operators earlier this year did not address this point either. I would expect to see the regulator try to develop its thinking further in this regard, so that the Consumer Duty-driven focus on vulnerable consumers in future also applies to providers receiving DB pension transfers.”