Demystifying defined benefit pension transfers

Peter Lovegrove Peter Lovegrove

Since the pension freedoms changes in 2015, a whopping £92 billion has been transferred out of defined benefit (DB) schemes, according to estimates from The Office of National Statistics, with £33 billion being withdrawn in 20181.

Although this was down on the estimated £36.9 billion withdrawn in 2017, DB transfers are likely to remain an important part of the retirement planning landscape, at least in the medium term.

But advice on the merits of a DB transfer is likely to be complex and profound, and the FCA is increasingly concerned. Against the backdrop of the British Steel Pension Scheme2 debacle, the Financial Conduct Authority (FCA)’s recent supervisory work suggests that while 69% of advice (between April 2015 and September 2018) results in a transfer recommendation, advisers give suitable DB transfer advice less than half the time (48%), compared with 90% in other areas. This is pretty sobering, especially given the likely impact on the quality of people’s lives in retirement. The FCA estimates that consumer harm from unsuitable pension transfers amounts to between £1.6 billion and £2 billion per year – not including people paying too much for this advice.

What has the FCA been doing?

New FCA rules and guidance aiming to improve advice on DB pension assets – set out in Policy Statement 18/63 – became effective in October 2018.

In a December 2018 notice4 publishing its latest supervisory findings, the FCA warned that “Any firm that is active in this market can expect to be involved in our work in 2019. We will not hesitate to use our investigatory powers where we identify evidence of serious misconduct which could have caused harm to consumers.”

In March 2019 the FCA wrote to product providers5 setting out what it sees as the major drivers of customer harm when designing, marketing and providing products that accept DB transfers.

In June 2019 the FCA published the results of its market-wide data-gathering exercise, whose aim was to understand the size of the market and prevailing trends6.

And in July 2019 the FCA published Consultation Paper 19/257, a package of proposed measures to increase requirements for advisers. The headline-grabbing proposal was a ban on contingent charging for DB transfer advice. But the Consultation also included other significant proposals, including requiring advisers to explain why a workplace scheme is ruled out as a receiving scheme (if applicable); and a new ‘abridged advice’ option which can only result in a recommendation to retain benefits in a DB scheme.

In short, the industry can’t say that it hasn’t been warned. In CP 19/25 the FCA stated meaningfully that “we expect the market for pension transfer advice to contract as a result of our interventions, at least in the short term.” At some point you are likely to be challenged to demonstrate that your advice, products or services lead to good customer outcomes. Here are some fundamental considerations for advisers and product providers.


Your goal as an adviser is to identify and quantify a client’s true, realistic income and capital needs in retirement, and then determine how best these can be met – considering all their available assets, not just the DB scheme.

Of course, advisers must meet the Appropriate Pension Transfer Analysis (APTA) requirements, including explaining the Transfer Value Comparator (TVC) – being mindful of the proposed changes to some of the assumptions, as proposed in CP19/25. And the FCA has made clear that inadequate and imprecise fact-finding, which lacks colour and detail, is a likely root cause of customer harm.

But crucial to suitable advice is an understanding that recommending either remaining in a DB scheme or transferring out is only one part of a bigger picture. A DB transfer is not an end in itself, it is one possible means, among several options, of realising a client’s retirement needs.

So don’t underestimate the value of the service you provide. A client may have sought advice looking for a DB transfer or have thought the advice would not go further than recommending staying in or leaving the scheme. But the client should emerge from the advice process understanding what their retirement needs really are, whether and how they can be met and the role their DB assets can play. The peace of mind this provides is invaluable and well worth paying for – whether they transfer out or not.


Providers must be able to show that they know for whom their products are more and less likely to be suitable, and that their approaches to design, marketing and distribution are such that they reach the target market. Any exceptions should be identified and addressed.

Where DB to defined contribution (DC) transfer advice is given by an intermediary, that intermediary is responsible for the advice to the customer, rather than the provider that receives the transfer value. The FCA recognises this, but providers cannot absolve themselves of responsibility. The FCA is likely to see providers as well-resourced and with the power to reach large numbers of consumers. Providers are therefore part of the solution to improving customer outcomes – whether they gave transfer advice or not.

The guidance contained in the FCA’s Responsibilities of Providers and Distributors8 document specifies several important regulatory expectations. An inability to demonstrate appropriate consideration in this respect would be a significant risk.

It is good practice to have policies and procedures governing the acceptance of new business, clearly articulating a target market and any circumstances under which transfers would not be accepted. It is also important to collect management information regarding the intermediaries who refer DB to DC business, to manage risks and to be able to act to protect customers’ interests if necessary.

One other pertinent question: Can you demonstrate that products developed before April 2015, but which still receive DB pension transfers, remain able to meet customers’ needs and goals in light of the pension freedoms?

For more detailed analysis and information on how we can help, please download Defined benefit pension transfers: In the spotlight [ 194 kb ].

If you would like to discuss managing any risks associated with DB pensions in your firm, please get in touch with Alex Ellerton.


  1. MQ5: Investment by insurance companies, pension funds and trusts: October to December 2018, Office for National Statistics, March 2019
  2. FCA updates on its work on financial advice given to members of the British Steel Pension Scheme (BSPS), Financial Conduct Authority, December 2017
  3. PS18/6: Advising on Pension Transfers, Financial Conduct Authority, March 2018
  4. Key findings on our recent work on pension transfer advice, Financial Conduct Authority, December 2018
  5. Dear CEO letter: Managing the risks of Defined Benefits to Defined Contribution transfers, Financial Conduct Authority, March 2019
  6. Defined benefit pension transfers – market-wide data results, Financial Conduct Authority, June 2019
  7. Pension transfer advice: contingent charging
    and other proposed changes, Financial Conduct Authority, July 2019
  8. The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD), Financial Conduct Authority, 2013

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