The UK financial advice industry has been rocked by several issues over the last few years, but the defined benefit (DB) pension transfer market has certainly played its part.
Despite experiencing its fair share of scandals, it is still thriving.
In July 2019, the Pensions Regulator said the number of DB transfers skyrocketed by 163% in two years, reaching 210,000 transfers in the 2018/19 financial year, which equated to £34bn ($42.4bn, €38.1bn).
Overall, 390,000 DB transfers have been made (worth £60bn) since the pension freedoms were introduced in 2016.
Steve Webb, director of policy at Royal London, told International Adviser that transferring out of a DB scheme may be done to guarantee a pensions’ longevity, escape the effects of turbulent “investment markets”, “provisions for a surviving spouse” and “inflation protection”.
“But for some people, there may be other factors which make a transfer appropriate.
“This could include poor health, where converting a lifetime income to a cash lump sum could leave more for your heirs, and it could include those with multiple pension pots who might consider cashing in one DB pension whilst retaining others, perhaps to facilitate early retirement,” Webb added.
But people seeking to transfer their DB pensions have not always been given the best advice.
In December 2017, British Steel Pension Scheme members were asked to shift their DB pensions to another plan; stay in the fund, which was moved to the Pension Protection Fund as British Steel was closing its existing scheme; or transfer out.
Some of those opting for the last option became entangled in a scandal which saw financial advisers encourage steelworkers to transfer their retirement pots to other investment, which resulted in people investing their money in esoteric, high-risk overseas funds.
The Financial Services Compensation Scheme (FSCS) has since received 77 claims about defunct firm Active Wealth and paid compensation totalling £1.8m to 61 individuals; plus complaints about others.
“British Steel was a particularly bad example where a lack of supply of reputable advisers left workers exposed to unregulated introducers and some advice firms who seemed to have been ‘rubber stamping’ transfer advice,” Webb added.
“Some of these firms have now lost their permissions to advise on transfers; but in my view the trustees of DB pension scheme should be doing far more to make sure people can access high quality and impartial advice.”
Tom Selby, senior analyst at AJ Bell, said that it is important to “separate” what happened in the British Steel case, “which centred on the activity of a small number of firms and unregulated introducers, from the wider advice market”.
Andrew Ward, partner of risk transfer, journey planning and DB consolidation at Mercer, told IA that “there is a lack of high-quality financial advisers and planners, offering pension transfer advice at an affordable price to members of DB schemes”.
Demand for transfers
Despite all of the issues surrounding DB pension transfers, is the demand still there?
“In our view yes, as many clients are actually unaware of any negativity,” the co-founder of wealth tech provider Wealth Wizards, Tony Vail, told IA.
“The reality is that much transfer request activity is still triggered by member to member conversations. With transfer values for most schemes at an all-time high, one employee getting a ‘high transfer value’ will tell plenty of their colleagues.
“In addition, there is a genuine need in many cases for a different shape of retirement income than that offered by DB schemes and ‘pension freedoms’, meaning people are more aware there are other options.”
AJ Bell’s Selby added: “Negative headlines will undoubtedly have some effect on people considering transfer offers, but in the right circumstances quitting your DB scheme can still be a perfectly rational decision.”
The high-profile British Steel case led the Financial Conduct Authority (FCA) to intervene in the DB pension transfers sector.
In June 2019, the UK regulator said it was disappointed with the number of advice firms recommending people to transfer out of DB pension schemes.
It found that 2,426 firms had provided advice on DB pension transfers. Of them, 1,454 firms had recommended 75% or more of their clients go ahead with the transfer.
Some 69% of 234,951 pension scheme members seeking advice between April 2015 and September 2018 had been recommended to transfer by firms with DB permissions.
AJ Bell’s Selby added that this intervention is not “what the FCA wants, although it may well be the result of its actions”.
“Ultimately, a positive longer-term outcome would be a DB transfer market which is safe and protects consumers, without blocking people from exercising choice over how they take their pension income,” Selby said.
Simon Taylor, partner at Barnett Waddingham, said the downside to this desire to improve “is that it will reduce the number of advisers available to members”.
But it will “force scheme sponsors and trustees to partner up with trusted firms to offer advice to their members”.
In a bid to reinvigorate the sector, the FCA said it will outlaw contingent charging for clients looking to transfer their DB pension.
This could cost financial advice firms between £360m-£445m per annum in lost revenue.
At the same time, the UK regulator put forward the idea of abridged advice, which is a concept that sees IFAs give a short form of advice based on a high-level assessment of a client’s circumstances.
But not everybody agrees it is a good move.
“Contingent charging outside of DB transfers is often a preferred option for clients,” Keith Richards, chief executive of the Personal Finance Society, said.
“The advice profession should not step away from using it as an option, but we must acknowledge concerns raised by the FCA specifically for DB transfers where the assumption must be that it will not be in most people’s best interests to transfer.
“Abridged advice is likely to confuse consumers about what kind of advice they are getting and, if introduced, we believe that it would become a future regulatory issue.
“Advice is advice. Consumers simply don’t understand or differentiate between different levels of advice, no matter what name it might be given.”
Future of DB pension market
The British Steel and other scandals in the DB pension market did bring about positive change; such as the Pensions Advice Taskforce and the Pension Transfer Gold Standard, which is a code of good practice based on a consumer guide.
But the number of firms in the DB pension transfer market has dwindled because professional indemnity insurance premiums have risen to such highs, due to these scandals, that IFAs cannot afford to take out cover.
The future is unknown; but some in the advice sector expect DB pension transfers to still be a thing in the coming years, including Barnett Waddingham’s Taylor, who told IA that they are not going to go away.
Peter Bradshaw, director at Selectapension, said: “There are over four million people with deferred scheme membership who would benefit by understanding their options for retirement income, and whether to transfer or not.
“The future for DB pensions transfers is challenging, but sustainable and favours the experienced professional advice firms.
“It’s estimated there are around 5,000 qualified advisers who can provide this specialist advice. Against the potential demand of millions of people with DB scheme membership, there are not enough firms to meet future demand.”
Vail added: “Some suggest that the answer to this question is in the hands of the PI industry, but here at Wealth Wizards we think it can stay in the hands of advisers as long as they conduct a thorough, impartial and above all consistent process.”
Wrapped in uncertainty
Selby added: “DB transfers are clearly still allowed and can be suitable for members in a number of circumstances, particularly where they are in ill-health or have significant debts that need paying off.
“Equally, anecdotally we have heard of schemes offering relatively high multiples which could be attractive to those considering transferring out.
“However, a combination of FCA concern around certain features of the market and spiralling PI costs for advisers are likely to act as a brake on activity in the short-term.
“It is possible the volume of transfers will level out once the regulatory framework is crystal clear, although all of this is wrapped in uncertainty.”