FCA publishes DB pension transfer advice review findings

The FCA has published the findings of its latest review into defined benefit (DB) pension transfer advice, highlighting persistent suitability failings despite earlier reforms to the advice framework in 2017–2018. The conclusions matter for insurers both as DB de‑risking counterparties and as providers of DC and retirement solutions that receive transferred assets. For CIOs and capital teams, the review underlines ongoing conduct and redress risk in DB transfer flows that ultimately fund bulk annuity and DC investment strategies. • The regulator’s focus on unsuitable or unclear product and fund recommendations raises the risk that some insurer-backed solutions used post‑transfer are revisited in redress calculations. • The FCA’s insistence that all transfer advice be a personal recommendation hardens the liability perimeter around advice chains feeding into insurer platforms and funds. • Periodic reviews of redress guidance mean the economic cost of historic transfer waves remains a moving target for balance sheet and capital planning.

Advice framework and suitability standards

The FCA’s 2017 assessing suitability review reported that around 90% of advice on pensions and investments was suitable, but DB transfer advice was a clear outlier. The regulator stated it was “very concerned” that too many firms were not consistently providing suitable advice on transfers, signalling that DB business sat materially below the broader advice standard.

In response, the FCA used CP17/16 to propose updates to pension transfer requirements, and then PS18/6 to introduce a new rules and guidance framework aimed at enabling better quality transfer advice. The core rule change required that all advice on pension transfers must be given as a personal recommendation, increasing accountability for the suitability of each individual transfer decision. For insurers, this means advice feeding assets into their products is explicitly framed as personalised, increasing the likelihood that unsuitable flows translate into redress exposure somewhere in the value chain.

The FCA’s DB2 survey, which analysed 88 DB transfer case files where the recommendation was to transfer, exposed the depth of the suitability gap. Only 47% of the advice to transfer was assessed as suitable, 17% was unsuitable, and in 36% of cases it was unclear whether the recommendation was suitable. When the regulator looked at the recommended products and funds, just 35% were suitable, 24% were unsuitable and 40% were unclear, showing that product selection – not just the transfer decision – was a major weakness.

Conduct failings in DB transfer advice

The FCA has identified specific patterns of poor practice that are directly relevant to how post‑transfer assets are invested. It found firms recommending transfers where clients’ needs and circumstances meant that retaining the DB pension would have been in their best interests, indicating a fundamental misalignment between advice and client objectives. The regulator also highlighted cases where firms recommended clients transfer multiple DB schemes without considering whether transferring only one scheme would have been sufficient to meet their objectives, amplifying the volume of assets moved into DC and retail solutions.

In addition, the FCA reported that some firms over‑emphasised the benefits and downplayed the risks of transferring to alternative arrangements. For insurers, this goes directly to how risk, guarantees, investment volatility and income sustainability are described in adviser and distributor materials for annuities, drawdown and multi‑asset funds. Finalised Guidance 17/9 (FG17/9) specifies how firms should calculate redress for unsuitable DB pension transfers, defining the financial impact of advice failings on providers and intermediaries. This periodic review means the methodology for quantifying loss – and therefore the cost of remediation – is not static, and can be recalibrated as markets, products and regulatory expectations evolve.

Scale and timing of the DB transfer wave

From the introduction of pension freedoms in April 2015 up to September 2018, official figures suggest that nearly a quarter of a million people took advice on a DB to DC pension transfer. Around 170,000 of those individuals transferred out, with sums transferred exceeding £80bn, creating a substantial pool of assets now sitting in DC schemes, platforms and retail retirement products. Transfer activity surged, with a peak in 2017 and early 2018, coinciding with the FCA’s consultation and early supervisory work on DB advice.

This concentration of flows means that a relatively narrow vintage of business could carry disproportionate redress and reputational risk for the industry.

The FCA’s latest findings keep DB transfer advice firmly in the regulatory spotlight, and the next formal review of redress guidance will be a key decision point for how much of the historic transfer wave ultimately crystallises as compensation costs across the advice and product ecosystem.

--- Sources: https://www.fca.org.uk/ https://www.fca.org.uk/publications/multi-firm-reviews/key-findings-our-recent-work-pension-transfer-advice https://www.fca.org.uk/publication/impact-assessments/advice-on-pension-transfers-cp17-16-and-ps18-6.pdf