Patrick Heath-Lay: The direction of travel on pension transfer reform is the right one. The challenge now is to ensure it is delivered in a way that works for the whole market.
The Financial Conduct Authority’s (FCA’s) proposals to improve the pension transfer process represent a significant step in the right direction.
The regulator's proposals acknowledge something the industry has long understood but has not yet addressed – transferring a pension is not just about the speed it is transferred, but also about the quality of the decision in the savers interest.
Transfers have long term consequences for the adequacy of people's retirement outcomes and, at the moment, savers are far too vulnerable in these transactions.
A greater focus on clearer information and better decision-making is therefore welcome.
Moving away from a system that prioritises speed and convenience towards one that supports quality of outcome is long overdue and something we have been calling for some time. Implementing reforms now - even if they are refined over time - is far preferable to maintaining the status quo which leaves savers at risk.
However, these proposals will only work properly if they apply across the whole defined contribution (DC) market.
Why scope matters
As currently framed, whether a saver benefits from these new protections will depend not on their circumstances or needs, but on historic decisions made by their employer.
Millions of people hold pensions regulated by either the FCA, The Pensions Regulator, or both. Yet under the current proposals, only those in FCA-regulated, contract-based schemes would be covered.
If trust-based schemes are excluded as is proposed, we risk creating a two-tier system of protection. Savers in one part of the market would receive clearer information and stronger safeguards, while those elsewhere would not – despite holding pensions that look and feel identical. From a consumer's perspective, that distinction is invisible, and rightly so.
There is also a risk of unintended consequences. Regulatory gaps have a habit of being exploited. Trust-based schemes with weaker protections could become targets for consolidation activity simply because they sit outside the new framework. That is not a theoretical concern; it is how regulatory arbitrage works in practice.
Why partial reform risks unintended consequences
This also matters in the context of the wider pensions reform agenda. Regulators are increasingly focused on Value for Money (VfM) – judging pensions on the core drivers of long-term outcomes: investment performance, charges, and service.
The transfer process should reflect that same principle. Pensions should be judged on those core elements in a consistent and comparable way, regardless of whether they are trust- or contract-based. Creating different communication requirements for different parts of the market would cut across that objective and risk shifting the focus away from outcomes.
There is also a practical consideration. Pension transfers rely on shared industry infrastructure spanning both trust- and contract-based schemes. A split approach would require parallel processes, adding friction and cost to a system that functions best when it operates cohesively.
Rather than simplifying the market, this would add unnecessary complexity, increase administration costs and ultimately slow transfers down - exactly the opposite of what reform is intended to achieve.
A better solution is well within reach
With close coordination between the FCA and the Department for Work and Pensions, aligned regulations could be introduced at the same time across both sides of the market.
That would enable a single, whole-of-market approach to transfers – one that affords the same protections to all savers, supports the value-for-money agenda and avoids adding unnecessary regulatory burden.
There is also an opportunity to strengthen the proposals further by addressing incentives, which we have long argued have no place in pension transfer decisions and should be banned.
Our research with the Behavioural Insights Team shows that even relatively small cash incentives can distort behaviour, encouraging people to act before properly assessing whether a transfer is in their long-term interests. In practice, incentives can lead savers to overlook key information and move into poorer-value pensions - exactly the kind of outcome these reforms are designed to prevent.
While the FCA has signalled that such incentives are unlikely to be compatible with Consumer Duty, stopping short of an outright ban creates uncertainty and uneven enforcement.
The direction of travel on pension transfer reform is the right one. The challenge now is to ensure it is delivered in a way that works for the whole market.
If regulators act together, this can be a moment that meaningfully improves outcomes for all savers. If they do not, this well-intentioned reform will leave avoidable gaps behind and millions of savers in a much more vulnerable position.
Patrick Heath-Lay is chief executive of People's Partnership, provider of People's Pension
This article follows a consultation by the Financial Conduct Authority (FCA), Adapting our requirements for a changing pensions market (CP25/39), which closed yesterday (12 February). The consultation outlined proposals for a new regime for interactive digital pension planning tools for in-force pensions and a new process to support non-advised consumers to make informed decisions about whether and where to transfer or consolidate their defined contribution (DC) pensions.
Read Professional Pensions' article on the industry response to the consultation here.
