The regulator’s consultation on redress for unsuitable DB transfers should be put on hold until a new definition of suitability has been determined, says Aegon.
The provider says a new definition of suitability for DB transfers is a prerequisite for the FCA to be able to determine how redress should be calculated for DB to DC transfers.
Under current rules suitability of DB transfers is calculated on the basis of whether the DC pot can more than replicated the income being surrendered, but does not factor in the potential benefits to the client flowing from the 2015 pension freedoms.
Aegon is calling for DB transfer advice rules to be changed first, to reflect the client’s primary objectives, including post-freedoms flexibility around death benefits, rather than a strict critical yield approach, before determining how redress for unsuitable DB advice recommendations should be considered.
The FCA’s current guidance consultation GC17/1 is looking at changes to the way firms calculate redress for unsuitable DB transfers. The redress consultation was launched in March, but the FCA has since revealed plans to consult more broadly on DB transfers.
Aegon pensions director Steven Cameron says: “The FCA is consulting on updating redress calculations where advice on DB transfers is found to be unsuitable. But the far bigger question is, in a post pension freedoms world, what is suitable advice and what’s not. The surge in demand for DB transfer advice means advisers need urgent regulatory clarity from the FCA to allow them to support clients achieve their objectives in this complex area.
“People used to transfer out of DB schemes in the hope of securing a higher retirement income through an annuity but now, their objective is often to access the Government’s pension freedoms which have proved popular with their DC pensioner peers.
“There’s growing acceptance that if the primary objective is flexibility, advice shouldn’t be based solely on the likelihood the transfer value will secure an annuity at scheme pension age above the DB benefit given up. Advisers quite rightly need to explore wider objectives and the additional value to the individual offered by pension freedoms, such as choosing when to start taking an income, how to shape income year on year and leaving funds to loved ones.
“Before updating redress calculations, the FCA needs to clarify when DB transfer advice will be considered unsuitable. If the individual does want to take a guaranteed income from scheme pension age, then redress based on the traditional TVAS approach may be reasonable. But if the individual has made clear they are looking for flexibility, basing redress on annuity replacement costs just doesn’t seem right.
“The way forward may be two completely different redress calculations depending on the primary objective. We believe the FCA is putting the ‘cart before the horse’ and should put the current guidance consultation on hold until after its forthcoming wider consultation on DB transfer advice.”