The Financial Conduct Authority (FCA) has published its study on the defined benefit (DB) pension transfer market in the 18 months to the end of March 2020, providing further evidence that the regulator has no intention of letting up on the sector.
It comes hot on the heels of a DB advice assessment tool (Dbatt), which it released this week to help the market understand how the regulator looks into the suitability of advice given on pension transfers, and a year after it banned contingent charging.
The data confirmed the ongoing fall in the number of firms with regulatory permissions to offer DB transfer advice, which now stands at 1,521 – down from 1,965 in March 2020 and 3,042 in October 2018.
In July 2020, the FCA sent a data request to 1,965 firms which had full permission for DB transfer advice, of which 1,797 firms (91%) responded.
The research found 1,310 firms gave DB transfer advice over the 18-month period.
Some 87,491 clients received advice between October 2018 and March 2020.
Of those, 49,456 clients (57%) were provided with a personal recommendation to transfer or convert their pension and 38,035 clients were recommended not to transfer or convert their DB pension.
This means the DB transfer ‘conversion rate’ fell to 57% between October 2018 and March 2020 from 69% between April 2015 and September 2018.
Of those clients advised not to transfer, 8% (2,936) were recorded as ‘insistent clients’ and their pension transfer or conversion was subsequently arranged.
Steven Cameron, pensions director at Aegon, said it was “encouraging” that “the FCA has noted ‘signs of improvement’ including a ‘significant fall’ in conversion rates, or the proportion of clients being advised to transfer”.
“The FCA has repeatedly stated that conversion rates witnessed in previous periods were higher that they believed they should be, which has been one of the key drivers behind a strong regulatory focus and tightening of rules in the DB transfer advice market.
“The data is from a reporting period which predates the most recent set of October 2020 rule changes so will set a benchmark for in future assessing the implications of these latest changes.
“The ban on contingent charging is likely to have a major impact on the market, with the latest data showing over three quarters of DB transfer advice was previously carried out on a contingent charging basis.”
During the period, 108,124 clients used a triage service to determine if a transfer was in their best interests.
Just under half (46%) were recommended a transfer; while 20,633 clients decided not to proceed after the initial triage discussion.
There were 121 firms that facilitated transfers for 2,936 insistent clients, 63 firms reported that they had accepted introductions from unauthorised introducers and 785 firms in the market used contingent charging between October 2018 and March 2020.
Some 108 firms arranged 500 transfers into a workplace pension.
Firms advised on a total value of £30.3bn ($41.3bn, €34bn) between October 2018 and March 2020. This is made up of £20.1bn in recommendations ‘to transfer’ and £10.2bn in recommendations ‘not to transfer’.
The average transfer value fell to £336,496 in 2018-20 from £352,303 in 2015-18, with a disparity between the average fund for those who were advised to transfer (£405,178) vs those advised not to transfer (£267,814).
British Steel Pension Scheme
The FCA also asked additional questions to identify firms who advised clients on the British Steel Pension Scheme (BSPS).
Of the 1,310 firms currently active in the market, 254 firms (19%) provided 3,427 clients with a personal recommendation to transfer from the BSPS in 2017-2018.
The FCA said: “We aim to follow-up with every firm that was materially involved in providing BSPS advice. As we have done to date, where we find that their advice may have been unsuitable, we will tell them to take appropriate corrective action.
“Where we suspect serious misconduct has occurred, we will undertake enforcement investigations. We are currently undertaking approximately 30 investigations into firms and individuals where the principal focus is DB pension transfer advice.”
Professional indemnity insurance
The UK watchdog also found 1,191 firms (91% of the population holding a DB transfer permission) held professional indemnity (PI) insurance to cover DB transfer advice they provided.
Of these, 364 firms (28%) had an active PI policy with exclusions and 119 firms (9%) did not have PI cover.
The FCA said: “We expect that all firms providing DB transfer advice have appropriate PI cover in place, in line with our rules. If they don’t, they must not carry out DB transfer advice.
“We continue to engage with interested stakeholders in the market to monitor and assess the availability of PI for DB transfer advice as the PI market evolves. We have engaged with professional and trade body representatives from the advice sector, as well as speaking directly with individual insurers and brokers.”
‘Cloud’ of the scandal
Tom Selby, senior analyst at AJ Bell, said: “Even before the FCA banned contingent charging in October last year, the proportion of people advised to swap their guaranteed DB pension for a defined contribution (DC) alternative had fallen significantly.
“From the regulator’s perspective this is viewed as a positive development as it continues to believe such transfers are unlikely to be in people’s best interests.
“Of course the other side of the coin is that, with the size of the DB transfer advice market shrinking dramatically in the face of tougher regulation and rising PI costs, many people who would benefit from advice simply cannot access it.
“And where someone would be better off switching from a DB to a DC scheme – for example because the death benefits are more favourable – if they cannot speak to an adviser they risk being stranded in a sub-optimal financial position.
“Throughout all this, the cloud of the British Steel transfer scandal hangs over the market.
“The FCA is rightly going through those cases with a fine toothcomb to make sure any poor behaviour is punished and customers treated unfairly are compensated.”