Client Affairs

Smart Approaches To UK Pension Transfer Advice

Douglas Cherry, 2 July 2018


New freedoms to how people can use their defined benefit pension funds create opportunities for wealth managers - and a few challenges. The UK regulator has recently weighed in on the subject. This commentary examines the state of play.

Last week the UK’s main financial regulator, the Financial Conduct Authority, recommended how firms, advisors and clients should deal with recent freedoms to shift money out of final-salary pensions into defined contribution schemes. With billion of pounds in play, this publication has noted in the past that pensions have become a sexier subject for wealth managers. Some commentators are concerned if people take out money from defined benefit pensions and blow money on consumption and end up without enough retirement funds. The potential for mis-selling and sharp practice is still a worry. (To see a feature about the reforms, announced about three years ago, see here.)

The FCA’s new paper, CP18/17: Retirement Outcomes Review: Proposed changes to our rules and guidance, sets out a number of changes, with a big focus on communicating effectively to clients and providing coherent options for people looking to use the pension freedoms.

More broadly, what should the industry do about how to handle pension transfers? In this article, Douglas Cherry, partner at Reed Smith, considers the issues. This publication is pleased to share these insights. It does not endorse all views of guest writers and invites readers to respond. Email

The FCA continues in its obsession with pension transfers and ensuring that clients receive clear advice that is in their interests. A common criticism made by the FCA is the consideration of how advisers go about their assessments of the client’s position and then how that is documented and explained to clients.

Recent FCA Consultation and Policy papers relevant to pension transfer business set out the regulator’s concerns and highlight some areas for improvement.

Most recently, this has focussed on Defined Benefit schemes and the perceived risks and harms to clients in transferring from them. CP18/7 (1) considers these points and proposes changes including explicitly recognising a category of risk (the client’s attitude to investment transfer risk) to be addressed in any assessment of a client’s options by the firm.

CP18/7 also posits that advisors should be considering:

-- the risks and benefits of staying in the existing scheme and similarly, the risks of transferring;

-- the client’s attitude to any restrictions on their ability to access funds within a safeguarded benefits scheme; and

-- the client’s attitude to certainty of income throughout retirement and the likelihood the client may need to access funds in an unplanned way

These criteria reflect the current FCA preoccupation with the need to capture emotional views of the client (preferably in the clients’ own words) when gathering information sufficient to make a personal recommendation to that client. This emphasis on the emotional perspective is a common mantra from the FCA and now is being expanded (if the FCA proceeds with its CP18/7 suggestions) to specifically include transfer-risk relevant information from the client.

Coupled with this, is the secondary observation of the FCA that advisors should seek to rely less on metric-based tools as the principal driver behind personal recommendations being provided to clients, or at the very least review and enhance those tools to capture and assess the emotional language of the client on relevant topics.

Intersection with current practices
Advisors traditionally assess a client’s attitude to risk on a sliding scale, from some definition of cautious to adventurous (accepting that the precise labels applied by different advisers will vary, although retaining the general concept).

In order to avoid falling foul of the FCA in this area, and irrespective of the precise detail of any upcoming rule changes, advisors should consider now augmenting their current approach by ensuring there is greater emphasis on recording and reflecting the client’s own terms and attitudinal statements, and capture this in some detail. Failure to do so will (and has for many firms) draw significant criticism from the regulator, despite there being a lack of prescriptive guidance as to expectations.

In recent anecdotal observations, the FCA persists with aggressive criticism of what it deems deficient information retention and has taken enforcement action against firms and their appointed representatives without quarter where it perceives deficiency. This appetite is displayed across all areas of pension transfer advice both including and excluding defined benefit schemes; although in the latter case there is even greater concern and focus by the FCA.

The primary driver for this concern is the best interests of the client and whether advice provided around pension transfers meets those interests. The criticism has been around the process of information gathering, the factors being assessed, the absence of emotional-based evaluative statements from the client and the management of conflicts of interest.

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