Laura Miller considers what the future holds for planners advising on pension transfers
Pension transfer advice after the British Steel scandal is like the five-day office working week after Covid-19 – irrevocably changed. The number of defined benefit (DB) transfer advisers fell from 2,426 in September 2018 to just 1,310 in March 2020, according to Financial Conduct Authority (FCA) data.
“Given its stated intention to drive out the ‘bad apples’, the drop would look like a good result for the regulator,” says Fiona Tait, technical director at Intelligent Pensions, which specialises in transfer advice. But that only holds true “if we believe it is primarily the ‘bad’ firms that have left and it is far from clear this is the case,” she says.
According to many witnessing the exodus, those leaving are good advisers inconvenienced by the regulatory tightening but poleaxed by the chain reaction of scandal among panic-stricken professional indemnity (PI) insurers and the now gospel FCA stance that “it is in the best interest of most consumers to stay in their DB pension.”
“The pension transfer market is now largely dictated by the PI market,” says Darren Cooke, Chartered financial planner and owner of Red Circle Financial Planning. Worried how past DB transfers will be judged by the Financial Ombudsman, PI insurers are refusing cover or rocketing premiums. “It is not unusual to hear of firms facing a PI bill two or three times higher,” says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. No complaints is no guarantee of cover at a reasonable price, she says. Many link this to the falling adviser numbers, rather than any causal improvement in quality.
With fewer advisers willing and able to offer this advice to individuals, it is putting people at risk of scammers looking to exploit a vulnerability in the market
“Firms have been forced to give up because they no longer have PI cover, or the cost is not justified by the amount of transfer business they do,” says Mr Cooke. Who is best comes down to who has the deepest pockets. “Larger firms left may well deliver quality advice but their presence is driven more by their ability to pay, than their service,” says Ms Tait.
Mr Cooke, meanwhile, is pessimistic about the future. “My fear is that even the few specialist firms will exist for a short period, then PI insurance will be withdrawn or become unaffordable and they will close, leaving the Financial Services Compensation Scheme (FSCS) to pick up any complaints,” he says. From Keydata to Capita, the neverending end game is even greater FSCS levies.
Gross breaches of trust by some advisers that left pension holders with next to nothing for retirement led to FCA Final Guidance in March 2021, including specific permissions and an explicit connection, in advice and adviser liability, between giving up safeguarded pension benefits and where to invest those funds. Without PI market and/or regulatory adaptation, however, the consensus is that future access to advice will become frustratingly scarce and prohibitively expensive for pension holders, punished by PII and regulatory systems focused as much on self-preservation as them.
“It risks people being locked into DB schemes where it would be in their best interest to transfer,” warns Stephen Scholefield, pensions partner at Pinsent Masons. For example, where a single member would rather have a benefit without a spouse’s pension. Some trustees may try to counter expensive advice by playing matchmaker between their members and a single pension transfer firm for cost efficiencies, and help ensure quality advice, says Mr Scholefield. But even this may fail. “If such advice is regarded as being too expensive, trustees may be less willing to do that, and members wishing to obtain their own advice would be in an increasingly difficult position,” he says.
Centralisation, while easier to control from the FCA’s perspective, could also create an undesirable concentration of transfer decisions at a few advice firms. Or worse. “With fewer advisers willing and able to offer this advice to individuals, it is putting people at risk of scammers looking to exploit a vulnerability in the market,” says Ms Morrissey. This has the potential to be of at least as much concern to the FCA as bad pension transfers – though the recent expose by the Independent news website of the regulator’s failure to act on warnings about mini bonds and the woeful prosecution rate for financial crime, suggests it is not a given that this will manifest as a rationalisation of the DB transfer market.
For advisers, what prior to 2018 was principles-based regulation, easy to misinterpret in its practical application, is now at least much more definitive: PS18/3, PS18/20, PS19/29, PS20/6 and FG21/3, plus the FCA’s Defined Benefit Advice Assessment Tool. In a nutshell, transfers cannot be justified ‘on the numbers’ where the transfer value is many times the pension, or for flexible benefits unless there is a solid and specific reason.
While waiting for any tempering of the rules once the anticipated bottlenecks appear, the solution for advisers, says Mr Cooke, is honesty with clients – about the difficulties in providing this type of advice now and also the costs, as well as pointing out that it may not be in their interest to transfer anyway. “Just because you can doesn’t mean you should, just because it looks right doesn’t mean it is,” he says – a lesson many advisers now apply to doing pension transfer business.
Laura Miller is a freelance journalist