Under new rules to be introduced from 1st October, IFAs who are recommending a transfer out of a DB pension will need to benchmark the proposed destination for the funds against a low-cost workplace pension.

But many of these workplace pensions were designed for automatic enrolment and regular contributions by active members rather than large transfers in from Defined Benefit (DB) pension schemes by members approaching retirement.

New analysis from consultants LCP based on a survey of master trusts shows that, as a result, this new FCA requirement may not provide the consumer protection that is intended.

In the current DB transfer market, most transfers are to self-invested personal pensions (SIPPs), personal pensions or to retirement products such as drawdown accounts.

Relatively few transfers are to master trusts or to the existing workplace pension of the transferring member. The FCA has expressed concern that some of the products currently commonly used for transfers come with multiple tiers of charges and may represent poor value.

In order to put pressure on advisers to justify these charges, and to drive them down, the FCA will now require advisers to benchmark the proposed investment product with transferring into the clients’ workplace pension, which may offer a lower cost, particularly master trusts by virtue of their scale.

However LCP says there are two reasons why this benchmarking may not achieve the desired goal. Firstly, it says the FCA increasingly expects DB transfers to be suitable only for those approaching retirement, some of whom will not be members of a workplace pension scheme; an adviser can therefore explain that this comparator is not relevant to this particular client.

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