Guest contribution by Sweeny Kamur
UK pension laws and systems have undergone significant changes in the recent past. Pension exemptions were introduced in April 2015 to give individuals better and better access to their pension funds and the ability to transfer their pension funds Pension fund from defined benefit systems to defined contribution systems and vice versa.
Since the introduction of pension exemptions, the government has regularly assessed companies advising on pension issues and the suitability of their advice. Government agencies involved in the process include The Pensions Regulator (TPR) and The Financial Conduct Authority (FCA).
While the TPR deals with occupational pensions and their regularity, the FCA is responsible for maintaining an adequate level of consumer protection and competition across the pension landscape.
The FCA has published one Package of measuresto address the weaknesses of the market. This is a step to protect the interests of defined benefit pensioners.
The steps include a blanket ban on conditional charging to avoid conflicts of interest for financial advisors. Currently, a financial advisor is only paid when clients transfer their pension. This payment is known as a conditional charge and creates a situation where advisors may be biased towards wire transfers and recommend the wire transfers to their clients.
Therefore, financial advisors will be banned from conditionally charging fees effective October 1, 2020. The advisors are expected to offer a company pension scheme as a reception arrangement for the transmission. If you recommend something else, you must justify your suitability recommendation.
The changes were made by the FCA to protect the interests of retirees in the defined benefit pension system. The FCA had observed too many cases where the pension transfers were not in the best interests of clients and the transfers were recommended to serve the interests of the financial advisors.
Amazingly, one out of six files examined by the FCA showed signs of inappropriate advice! The inappropriately high level of unsuitable advice can have serious consequences for customers and worsen their retirement. If you switch from a defined benefit pension system, the transfer cannot be reversed.
A transfer means that pensioners lose the guaranteed income and lifetime protection that the defined benefit pension system offers. They need to start making investment decisions and contributing to their defined contribution pension system.
The value of your pension fund is also affected by the change in the value of your wealth, so you may have less money and even run out of money when you retire. Pensioners who leave a defined benefit pension system have others Pensions and investments or have limited life expectancy.
In addition, the current worrying economic climate has triggered a new wave of pension fraud due to COVID-19. Pensioners are very vulnerable to pension fraud because pensioners have problems and are concerned about the impact of the pandemic on their savings and pension accounts. The total number of pension fraud cases has reached 2,100 since February 2020, with fraudulent activity of over £ 5m.
Therefore, it became necessary for the FCA to intervene and protect the interests of pensioners. The measures and changes include steps to reduce conflicts of interest, support for counselors who want to do the right thing, and support for pensioners who are considering getting out of a defined benefit system or who have already moved out.
The FCA has launched an investigation 30 financial consulting firms who have given their customers inappropriate advice on the transfer of performance-based benefits.
Although the suitability of advice improved from 47 to 60 percent between 2015 and 2018, the high number of unsuitable advice and information gaps remains a matter of great concern.
As part of its 2017 investigation, the FCA examined 192 cases of pension transfers from British Steel employees. The shocking discovery was that around 47 percent of employees received inappropriate advice, while 32 percent had information gaps. The watchdog is investigating the case further and has written to over 4,000 members of the pension system about how to complain.
The latest rules and guidelines on advice related to pension transfers apply to all companies that advise clients on pension transfers. This also applies to providers of professional liability insurance, compliance consultants and trustees, as well as sponsoring employers of company pension schemes.
The new guidelines and guidelines are also relevant for consumer representative groups, pension system members, pension system administrators, trading bodies that represent financial advisors, and contract pension system managers.
The measures published by the FCA are expected to provide relief and support to pensioners of the DB system, particularly in times of economic uncertainty and financial instability. The new rules and measures are expected to reduce the incidence of inappropriate advice and information gaps to meet the interests of financial advisors.
Sweeny Kamur is a financial content editor at Kensho Media
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