The defined benefit (DB) pension transfer market has caused a lot of problems for the advice industry, with rising professional indemnity insurance premiums and pension scheme scandals.

The Financial Conduct Authority (FCA) set out a range of measures in June 2020 designed to address weaknesses, in a bid to transform the space. This included steps to reduce conflicts of interest by banning contingent charging, as well as help for advisers “who want to do the right thing and provide good quality advice to their customers”.

Benchmarking

The FCA has also said that, from 1 October, IFAs who are recommending a transfer out of a DB scheme 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 DB pension schemes by members approaching retirement.

In the current DB market, most transfers are to self-invested personal pensions (Sipps), personal pensions or 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 costs down, the FCA will now require advisers to benchmark the proposed investment product against transferring into the clients’ workplace pension, which may well offer a lower cost. International Adviser spoke to several members of the industry to discuss the FCA’s benchmarking plan.

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