"The coronavirus crisis could prompt more people to take advice on transferring from a defined benefit to a defined contribution scheme. "
The regulator says it recognises that more consumers will worry about the effects of the coronavirus pandemic on stock market volatility and how it might affect the value of the investments in their DC pensions. At the same time, many may find themselves in an economically vulnerable position because of the pandemic.
The FCA said the coronavirus is also likely to mean more consumers take advice about transferring out of their DB pension scheme to a DC pension scheme.
The regulator stressed that advisers should still only consider a transfer as suitable if they can clearly demonstrate that the transfer is in the client’s best interests.
The FCA has also set out how advisers should tackle common customer misconceptions surrounding their pension and Covid-19.
It said firms should not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for individual clients. Firms should also address any misconceptions clients may have as a result of the crisis. For example, clients may think:
- ‘Cash equivalent transfers (CETVs) are at an all-time high’. Firms should not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds. They should consider the client’s circumstances and attitude to transfer risk if DB schemes offer larger CETVs.
- ‘Death benefits will be better in a DC scheme’. Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under two years.
- ‘My employer is going under, so my pension scheme will too’. Firms are generally not experts in employer covenant assessments. So where clients have concerns about the sponsoring employer continuing in business, they must provide a fair assessment of the benefits of the Pension Protection Fund.
While it may be more difficult in the current crisis to get information about a clients’ personal or financial circumstances, or about their pension schemes or other investments, the FCA said firms must not make a personal recommendation if they do not have all the necessary information.
The regulator also stressed that firms can have "meaningful discussions with consumers about the risks and consequences of some actions without straying into providing advice".
It released examples of the kind of communication which would not, in its view, amount to the giving of a personal recommendation, including:
- "If you sell when the market is down, you will likely suffer a loss in the value of your investments and might miss out on any increases in value in the future if markets recover."
- "If you need money in the short to medium term and have savings that could be used instead, you might want to consider taking some money from those alternative sources, if that still leaves money in rainy day funds, rather than to realise losses from the investment."
- "The Government has announced a range of measures to offer support to people during the pandemic. You may wish to investigate whether you are eligible for this support before withdrawing money from your investments."
- "If the product includes life cover, you should consider the implications of cancelling it, or stopping ongoing premiums, in light of the current additional health risks."
- "If you need or want to cash in your investment, you could lose out significantly in the longer term. So, you might consider only cashing in what you need."
Steven Cameron, pensions director at Aegon, commented: “As the FCA rightly highlights, the coronavirus crisis could prompt more people to take advice on transferring from a defined benefit to a defined contribution scheme. For some, this might be the right thing to do, and advisers need to be able to meet that need particularly where delaying could be to the significant detriment of the customer.
“The FCA has set out some potential misconceptions for advisers to face up to when advising clients. As it says, an increase in a transfer value doesn’t necessarily make transferring ‘better’. Similarly, death benefits are not always higher in the defined contribution world. Some clients may be particularly drawn to transferring if they believe their employer is ‘going under’ and here, the FCA reminds advisers to provide a fair assessment of the Pension Protection Fund.
“This guidance comes at a time when trustees may be considering deferring quoting or paying transfer values for three months. While some trustees may need to take time to review transfer calculation bases, the FCA is clearly and helpfully not envisaging a blanket ban. For individuals planning to transfer to draw a flexible income in the short term, or in ill health with genuine concerns over death benefits, it’s important that this market doesn’t go into lockdown and is allowed to continue to function.”
