FG (21/3) - Key points from the FCA's finalised defined benefit transfer guidance.

Author Image Mark Devlin Technical Manager
18 minutes read
Last updated on 31st Mar 2021

Remember the Fun Boy Three/Bananarama song it ain’t what you do it’s the way that you do it?

Last June we had the finalised rules on pension transfer advice (what you do). Now we have the response to the guidance consultation (how to do it) with the publication of Finalised Guidance paper FG21/3.

It’s non-handbook guidance designed to understand the FCA expectations on how to follow the rules. It focuses particularly on the processes firms need to put in place to give suitable DB transfer advice – and avoid giving unsuitable advice. So should you just consider them rules?

Most of what was consulted on made it through to the finalised guidance, there are some interesting bits of info and clarifications in this paper that makes fully reading it essential for DB advisers.

If you’re not involved in DB advice you may not need a forensic examination, benchmarking of your processes against the guidance. But there could easily be a read through for any pension advice

But as a warmup for that, here’s the key issues (and a few key reminders) that I identified within the paper.

Permission regime

Can I give the advice? A key issue!

In terms of what permission is needed, it’s limited or full.

  • limited permission: advising on transfers from GARs, including retirement annuities, only
  • full permission: all pension transfers, pension conversions and pension opt-outs

A transfer from an occupational scheme without safeguarded benefits ceased to be a transfer on 1 October 2020, so no transfer permissions are needed.

Opt-out permissions are not needed where there would be no redirection of contributions to a FCA-regulated replacement scheme, for example, because of LTA issues. But does this mean that you have to ignore any extra disposable income forever after that?

Permissions are not needed when advising a client on whether to join a DB scheme. The treatment of pensions and divorce is clarified. Permissions are not required as the pension credit is not regarded as safeguarded benefits (or money purchase or cash balance benefits) or a transfer payment but as a right in itself.

A technicality perhaps? If the ex-spouse has the option of securing defined benefits, then surely the guidance in the paper would need followed to deliver in their best interests?

If you advise an ex-spouse on using the pension credit to acquire rights in a DB scheme, this falls outside FCA-regulation. Clearly if selecting a DC scheme you must have investment advice permission.

However, whilst the permission may not be needed it would still be one to check over with your compliance department for their stance on this, as simply opting out to avoid charges may not be the best outcome for the client, especially if safeguarded benefits and/or employer matching are in the mix. These calculations can be quite complex as demonstrated in our Lifetime allowance and annual allowance planning for the high net worth client article.

Advising on GAR transfers only requires the firm to have limited permission. The interesting takeaway from the paper is the clarification that the starting assumption for transferring safeguarded benefits i.e. unlikely to be suitable for the majority applies equally on transferring GARs. 

Only limited permissions are needed, but there’s still a very high suitability bar to pass.

The paper pulled out in bold that DB advice has two parts to it, sometimes given by two different advisers. These are;

  1. whether to give up safeguarded benefits
  2. where to transfer the funds to, should a transfer proceed

They should not be treated separately. Transaction 2 cannot happen unless there is a PTS giving (or signing off) transaction 1 who must know where the funds are being invested when formulating their recommendation.

Lastly in this section a good call out was the example of the firm that clarified for clients they had an ongoing relationship with and had DB benefits, that the ongoing advice assumed the DB scheme stayed in place until NRA. They would only consider advice on the DB if the client approached them for this.

PI Insurance

A hot topic in the industry and the finalised guidance contains a reminder to PII distributors of the regulators expectations of them. Particularly in the TCF, Prod and COBS areas. There was also mention of the financial resources advisers had to hold over and above their PI policies. It’s not overly concerned with the advice process, so I’ll leave it at that but it is an essential read for all active firms.

MI and Introducers

Do you only collect information required in your Retail Mediation Activities Return? If so, you are probably not collecting enough information to have adequate systems and controls.

Think of conversion rates of transfers (down to a PTS level), how many clients then go onto insistent, how much of this business is form introducers, and is there a high proportion of insistent clients from introducers that may indicate an issue?

And clearly if your MI throws up an issue – make sure it gets dealt with.

Charging Disclosures

Nothing new here, but a reminder:

  • disclose the full personalised costs for the transfer, and this
  • must be the same whether the client transfers or not.
  • no separate implementation fee, (even if the advice ends up not to transfer).
  • Where two firms are involved should be disclosed as if there were one firm giving the advice.

Finally, remind clients who may go elsewhere for further advice they will face more charges.


The key message is that triage needs to be balanced, factual, unbiased and non-personalised. Care needs to be taken in any discussions with clients around DB transfers, that these do not stray across the advice boundary.

This may be particularly relevant if potential clients give you information that suggests they might meet the test for the carve-outs. You are not prevented from finding out more about their circumstances for the purpose of the carve-out, but you should take care not to imply their suitability for a transfer.

Good triage should cover the working of DB and DC schemes and cover the following;

  • the pros and cons of each type of scheme
  • a summary of the sorts of consumers who might typically benefit or not benefit from a transfer but without personalised references to the consumer’s own circumstances
  • information about the FCA view that most consumers are best advised to stay in a DB scheme, and that the FCA expects you to start advising from a position that a transfer will not be suitable
  • circumstances when you will decline to do business
  • the difference between abridged advice and full advice
  • the initial and ongoing costs involved

There is a rather long list in section 3.21 (that is described as a “non-exhaustive list”) of examples of the type of triage service that is unlikely to meet the regulators expectations.

If you can’t give your triage offering to all clients, then it probably needs relooked at.

Information Gathering

Material Information Gaps are a big issue with DB advice, and the paper has a lot of info on best (and worst) practice. Remember they could equally appear in abridged advice.

The paper also points out quite clearly that the KYC requirements for DB advice are more onerous than other forms of advice. They say, “If you use the same documents to get client information for a DB transfer case as, for example, for giving advice on an individual savings account (ISA), it is likely that your processes are inadequate.”

If this sounds like your processes, then your processes need improved.

The key bit in this section is where the bold print and hyperlinks came out, so clearly one that should grab the attention of the readers.

“If you do not get the necessary information to assess suitability, you must not make a personal recommendation to the client or take a decision to trade for them.”

Not ground-breaking, but if your file doesn’t have the necessary information to prove suitability, how can you expect a suitable grading if the case is reviewed? You need full disclosure, lots of hard facts and lots of soft facts focussing in on Financial Circumstances, Attitude to Transfer Risk, Attitude to Investment Risk and Capacity for Loss.

The key area is capturing all of the soft facts (the client’s feelings and opinions) that you get from the open questions. These are crucial for most file reviews, but even more so for DB transfers where behavioural and emotional issues e.g. around ATTR, are equally as relevant to suitability as the hard facts.

One example pulled out reflects the importance of checking “facts” and feelings. For example, your client may assume a short life expectancy as their parents died young. But sense check this, their father may have been a coal miner with lung issues and their mother dies of a non-heritable disease – those do not necessarily translate to your client’s circumstances.

The paper reiterates the three types of retirement expenditure:

  • essential expenditure reflects the bills that the client must pay and which they would find very hard or impossible to reduce
  • lifestyle expenditure supports the client’s expected standard of living, such as holidays and eating out that the client may not wish to compromise on
  • discretionary expenditure covers luxury items and gifts that the client may want to make, or current savings such as to a workplace pension scheme.

The ley point when it comes to capacity for loss is that it is the loss sustainable to maintain your standard of living, so lifestyle is actually essential.

Attitude to Transfer Risk (ATTR)

A very important phrase when giving up safeguarded benefits, hence the bold text reappearing. This isn’t their attitude specifically in relation to giving up safeguarded benefits. The risk assessment is specific to the transaction in question.

When assessing your client’s attitude to the transfer risk, you are assessing the client’s behavioural and emotional response to the risks and benefits of giving up guaranteed benefits in favour of non-safeguarded benefits. You need to ask your client fair, clear and not misleading questions to understand what it means for them personally. You need to assess your client’s attitude to the features of safeguarded and flexible benefits and understand their attitude to managing money.

Basically, these needs to clearly demonstrate that the client understands the risk they are taking by giving up a guaranteed income stream to enter the world of flexibility and all that could mean.

Attitude to Investment Risk

Very well known in financial planning. But with the DB glasses on, a client with a low attitude to risk and limited capacity for loss DB advice could be markedly different to advising on new money (perhaps an inheritance) as to what level of risk they are willing to take.

Capacity for Loss (CFL)

The paper (along with several comments from the FCA) are clear that this is numerical and not emotional. Capacity for loss is not the client’s opinion or thoughts – “they’ll tighten their belts if they have to”, it’s an analysis by the adviser based on facts.

Capacity isn’t a feeling from the client, this is purely numbers, but when speaking to a client about a potential to survive a 20% drop in income, their reaction may give a bigger clue as to their attitude for investment risk.

Could they give up one of the three holidays a year and still be ok with their lives? if that’s a non-negotiable as it’s their standard of living then the CFL is limited.

Objectives and Needs

The bold appeared again- “features of pensions freedoms are not client objectives”

Ask these questions – you’ll get predictable answers: Would you like to retire early?

  • Do you want to maximise a tax free lump sum?
  • Would you like to try and increase your income in retirement?
  • Do you want flexibility?
  • Do you want control over your own money?

These are features, they are not objectives.

Objectives are what clients need and want. If clients don’t know what they need or want, you can’t make a recommendation to meet them. Reasonable assumptions should be made where exact facts are not known.

If the objectives are unrealistic, have these been challenged?

There can be many objectives in retirement, but do these need balanced, are there trade-offs that can be made if all of these objectives cannot be met? Again, quantification of what can be achieved and what may need to be sacrificed is a critical component of the advice process.

But the most critical component is that the client’s needs are met before any objectives are dealt with. As the FCA said a few times – you are not order takers.

Abridged Advice

There were a few key points to pull out form the paper.

As with full advice the FCA’s starting position that the transfer is unlikely to be suitable still applies.

Based on what you know about a client you should consider whether it is in their best interests to go through abridged advice instead of going straight into full advice.

The guidance points out circumstances where this may not be suitable, for example if a client wants advice on different options available to them. This could be the case if they are considering a partial or full transfer, or which of multiple DB schemes potentially to give up. This doesn’t lend itself to a shortened form of regulated advice.

Also, if you do tell a client to stay in the scheme under abridged, and they are unhappy, they can only become insistent after full advice has been given.

If an abridged client who you have told to stay in the scheme asks for full advice, the FCA state that they would generally not expect the recommendation to change when full advice is given. So, if at the abridged stage you think full advice could change your decision, you should conclude that abridged advice is probably insufficient to make a decision about the suitability of a transfer.

Cashflow modelling and Abridged

You can “model” how the DB scheme benefits against their expenditure, but you cannot assess how well a proposed arrangement (hypothetical or real) would meet their objectives and needs because abridged advice does not consider how funds might be invested if a transfer proceeded.

They state, “You should not make projections based on the transfer value, get annuity illustrations or carry out any comparisons of the ceding scheme benefits with a proposed receiving scheme.”

In short, do not look into anything other than the DB scheme staying where it is. 

Appropriate Pension Transfer Analysis (includes the TVC)

The paper provides some excellent good and bad examples for the APTA So you should have a good read of this section

The key part that I read was in 5.35 where a client’s aspirations are not the be all and end-all, they may not be realistic and as such should not just be facilitated. To directly copy the bold part Advisers are not order-takers. If their objective is not realistic, what do they need to consider?

For example, if they are taking PCLS to simply pay off the mortgage as a client “need”, do they actually need to repay this mortgage? Is the debt more than serviceable, will this then have in impact on their actual retirement by stripping out up to 25% of their pension pot?

Challenge objectives, meet needs.


A key call out here if you use assumptions different to other documents e.g. the key features illustration. Make sure this doesn’t confuse the client, justify your differences and cover how the different assumption affects the outcome.

And your client should be aware that any figures that have been presented will not be borne out in practice (unless a multitude of assumptions all happen to have been spot on presumably!).

Workplace Pension Schemes

The rules on considering WPS have been in place since October last year, but a key point added to the guidance has been clarity on which WPS you review. The FCA have stated that you only have to consider the clients most recent WPS. The guidance then goes further and states that if the most recent WPS is not available (perhaps it doesn’t accept transfers in) then the next most recent WPS should be looked at (if applicable).

But giving advice in such a big area as a DB transfer, shouldn’t all potential destinations for the money be considered anyway?

Partial Transfers/Multiple schemes

A key call out here is make sure to ask if a partial is available, even if it doesn’t look apparent that it will. If you don’t ask you don’t know for sure, and therefore suitability could be called into question.

Likewise, if a full and partial is being considered a full and partial TVC should be prepared

Securing a guaranteed level of income for the clients essential and lifestyle needs can be achieved by using a partial. This then given them a greater CFL, and possibly a greater ATTR.

Where there are multiple DB schemes, the mix of secured and unsecured income can be achieved by leaving some of the schemes untouched.

And finally, where a partial is being considered to get that secured / unsecured mix. Be sure to consider a full transfer with a blended annuity/drawdown solution in case that could provide a better outcome. Surely an important consideration and research point?

The 2-adviser model

The key call out in this section was for the adviser giving the DB advice. Risk warnings are needed from the PTS in terms of the advice being based on where the investments go. They should explain the risks to the client of the funds not being invested as intended by the other adviser. The other adviser may not act as you expect and there could be harm to the client.

You could also warn the client about the risks of remaining in cash or investing in higher risk investments than you assumed when you gave the advice.

Demonstrating Suitability

Not the last section, but the last one with the key call outs as I see it

The first (and perhaps most obvious) statement in this section details that If you do not collect the necessary information including, for full DB transfer advice, the TVC and APTA, you must not make a personal recommendation. This is because you cannot be sure that your advice will be suitable.

But crucially, a transfer is not suitable just because you can show that the client would get the same or higher income than the DB scheme. Does their knowledge and experience, CFL, ATTR all back this up too? A higher income would be nice for all concerned, but what if the client would then be sacrificing lifestyle needs in retirement if the market were to drop slightly, and what if they feared running out of money etc. Can they take on this risk in the round?

Do they actually understand risk? For example, a client being invested in funds (perhaps though a WPS) doesn’t necessarily means that they are “investors” even if they take an active interest in this. You can’t just assume knowledge, there are plenty of people that work in financial services, but do they all know the same about investments, perhaps someone working in the HR department wouldn’t know as much as a very experienced paraplanner when it comes to investments.

Clients also need to be able to understand the recommendation in a personal and not generic manner, and having evidence of this is now required, if you don’t have this, you’re unlikely to meet suitability standards.

And as a parting thought (in the effectiveness of suitability reports)

A key call out to start with directly from the paper “In your suitability report, you must set out a clear recommendation of the course of action you consider is in the client’s best interests. If you give options that leave it to the client to decide what is most important to them, you are demonstrating that you don’t know your client well enough.”

Do not give options – that’s not advice.

It’s always been the dream to have short suitability reports, sometimes this is not possibly, but to ensure that suitability reports are as effective as they can be the FCA details that these should be (and I am directly quoting here (or copying and pasting to be precise));

  • concise enough that your clients will want to read them
  • carefully laid out, including sections with clear headings
  • written in plain language that your clients will understand
  • emphasise key information, so your client knows what is important
  • include helpful tables or charts from APTA to break up and support the text, rather than attached as an Annex

From a content perspective, your suitability reports should be personalised so they:

  • give plenty of detail about the client’s circumstances
  • confirm specific, client-focused objectives and needs and the relative importance of these to each client
  • provide explanations of why the recommendation meets the client’s objectives and needs, given their circumstances
  • contain detailed and in-depth information on any compromises and trade-offs for the specific client
  • contain only sections and clauses that are relevant to the client
  • contain client-specific risk warnings, rather than generic risk warnings

The FCA state that they have seen good suitability reports that are no longer than 5-6 sheets of A4.

But the one that really stuck out to me in this, and as I said my parting shot is using plain language that clients will understand. So, you mustn’t use a heuristic modus operandi for ascertaining a client’s cognitive ability to apprehend the admonition that you have conferred upon them. Or in plain English, just use plain English!

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