Compensation paid to those who have been wrongly advised to transfer out of a DB pension scheme has doubled over the past two years.
New figures from the Financial Services Compensation Scheme show that compensation for DB transfers rose to £40m in 2018, from just £20m in 2016.
However much of this increase was seen over 2017, where compensation stood at £37.5m.
In total there have been nearly 5,000 pension transfers carried out by firms that have ceased trading activities since 2015 following scrutiny by the FCA.
This increase comes after the introduction of pension freedom rules in 2015. This has prompted a massive increase in transfer activity from DB schemes.
According to the ONS there has been a seven-fold rise in transfer activity after the introduction of these rules. In 2014 the DB pension transfer market stood at £3.4bn, but this had risen to £37bn by 2017.
These FSCS figures, which were reported in The Financial Times, were a result of a request from Nick Smith, the MP for Blaenau Gwent in South Wales. The FSCS confirmed that its chief executive, Mark Neale, was happy to provide these figures.
This South Wales region has been hit hard by this issue, with an estimated 40,000 members of the British Steel pension scheme persuaded to transfer out of this DB scheme, following the decision by sponsoring company Tata to restructure the scheme.
The FCSC says it was currently unable to give further details about the advisory firms, or schemes which were involved in these compensation claims.
There have been calls for companies to do more to protect members from poor advice.
Killik & Co partner Tim Bennett says: “As we head into 2019 future retirees remain at risk from poor advice when it comes to pension transfers. Whilst the offer of a move out of a defined benefit scheme may bring the promise of extra flexibility and a large lump sum to invest, in many cases these benefits are likely to prove chimeric.
“That’s because the companies, or organisations, that offer such transfers to their employees are not doing so out of the goodness of their hearts – they base any offer on a rational desire to reduce their pension obligations over the long-term.
“For many employees, the predictability, certainty and longevity of their projected defined benefit pension income stream will be nigh on impossible to match any other way. My view therefore reiterates the FCA’s – if in doubt, don’t transfer out.”
FCSC chief executive Mark Neale says: “We see many examples of mis-selling as both regulated but also increasingly unregulated advisers, promote risky, illiquid investments.
“We see providers who fail to perform rudimentary due diligence on these investments.”
Smith told the FT that this increase in compensation was “absolutely shocking”. He adds: “Many people have ended up losing thousands of pounds of hard-earned money because of the poor advice they were given.”