The fierce debate about the issues of pension transfers from defined benefit schemes shows no sign of abating.
There is general agreement that problems emerged in the wake of the pension freedoms, launched in 2015, and that legislation combined with economic indicators that leant themselves to very high transfer values saw a huge boost to transfer activity.
The numbers are significant. In response to a Freedom of Information request last year, The Pensions Regulator revealed that for the period 1 April 2017 to 31 March 2018, DB pension schemes reported approximately 72,700 transfers out — although not specifically to a DC scheme. TPR says that the total value of those transfers was approximately £14.3 billion.
However, the regulator says that not all schemes have reported how many transfers they carried out, and it speculates that the actual figure could be in the region of 100,000.
In another FoI response last autumn, the FCA said that DB to DC transfers rose in 2018 by 587 per cent compared to March 2016. In the six months to March 2016, a total of 5,056 people transferred their pension. In the six months to March 2018 there were 34,738 transferring benefits out.
Ebbing transfer activity
There are now indications that transfer activity has now fallen back. The ONS statistical series showing transfers to other pension schemes indicated an initial spike following the freedoms, a falling back, and then a consistent rise from £2,363m in the first quarter of 2016 rising each quarter to a peak of £10,434m in Q1 2018 — but then falling to £6,331m in the fourth quarter of that year.
Although this isn’t granular information, it does appear to show a distinct falling off and that coincides with a significant period of regulatory activity.
In recent weeks, five directors of IFA firms— two of which are now defunct — have been fined, with the compensation scheme having paid out a total of £30m to affected customers.
There has been a steady stream of firms surrendering their pension transfer permissions usually on a voluntary basis, though clearly with strong FCA encouragement. Since the print version of this article was published, the sector has been rocked by the exit of LEBC, one of the biggest DB transfer firms, from giving advice on this controversial area of advice. A statement from LEBC says it has agreed with the regulator to ‘voluntarily alter its permissions to provide advice on transfer or conversion of safeguarded benefits within a pension arrangement’.
Many specialist firms have temporarily stopped offering transfer advice, though they have tended to return to the marketplace, after a reassessment of their processes. Arguably most importantly, many other general advisers confronted with difficulties accessing PI, or faced with exclusions and restrictions, have also withdrawn from the market. LEBC’s exit from the market has compounded the shortage of DB transfer advice available to scheme members.
Regulatory clamp down
The regulations have also changed across 2018. For example, specialist transfer advisers will have to be better qualified about investments, although only from next year. Advisers now have to undertake a “robust assessment of the client’s attitude to risk”, including a personalised analysis of the options, and a comparison to show the value of the benefits being given up. However the usefulness of some of the new bases for these calculations has been questioned. In addition, a recommendation report must be produced, with advisers explaining why they believe a transfer is appropriate or unsuitable.
The FCA stopped short of banning contingent charging, to the disappointment of some consumer advocates and advisers At the same time as this broad regulatory activity, the British Steel Pension Scheme threw the issue into even sharper relief in 2017 and 2018 with the troubled scheme offering members a switch to a new restructured scheme or the ability to transfer.
The disruption attracted scores of unethical advisers and introducers, leaving the FCA grappling not just with poor and inappropriate advice, but also issues with its perimeter as well.
As word of very poor practice spread around the market, the issue even prompted adviser volunteers to go to these towns such as Port Talbot to sense check advice, discourage some transfers and prompt some steelworkers who had acted already to complain. Once again, the FCA moved to act but some believe it moved rather late.
The British Steel issue prompted a range of regulatory actions, reports from MPs and a bespoke report from former head of the Money Advice Service Caroline Rookes, now interim chair of the Pensions Ombudsman, into the transfer exercise run by the trustees. Among other things she suggested that TPR explore with trustees and trade unions the possibility of creating panels of recommended advisers to help in such circumstances.
To sum up, we have seen broad market concerns and a specific crisis running in parallel with regulatory action. The result is a tighter set of regulations and probably a more conservative approach from the retail advice market.
There is another element of regulation, which is not directly about pension transfers, which may well have a huge bearing on the transfers environment. From April this year the Financial Ombudsman Scheme has been able to award £350,000 per complaint.
David Penney, chartered financial planner with Penney, Rudder & Winter — and one of the volunteering IFAs who spoke to steelworkers — has welcomed the changes in regulation, but believes it has been the professional indemnity market and the British Steel problems that have driven positive change.
“The transfer regulations are more appropriate than the previous rules in my view, with the exception of the Transfer Value Comparator discount rate, which is far too low.
“However, I am not convinced that the new rules have resulted in a slowdown. I think it is a combination of PI problems and the British Steel saga, which has made firms realise that there are only very specific circumstances when a transfer would be suitable. “The PI issue has frustrated access to advice, because people are now giving up their permissions.
“But the horse has bolted. We did not have any PI issues as we have taken a very firm view on DB transfers. Those who are suffering are mainly those who did lots of transfers.
“It is a shame it seems to have taken PI insurers to end the feeding frenzy, rather the regulator, but at least now there seems to be more awareness of the issue.”
Former regulator and now consultant Rory Percival says: “I think the FCA’s 2018 changes to rules and guidance on defined benefit transfers were spot on. The regulator was treading a very difficult line between having requirements that resulted in adequate protection for consumers without being so strict that it effectively shut down the market or severely limited access to advice.
“I think the end result was an excellent balance between these two positions. The requirements are very workable and pragmatic, but do require firms to go through adequate processes to ensure a better chance of suitable advice.”
He does however identify the change in the FOS limit as problematic. “I think the problem is that this year’s change in the FOS limit has shifted this balance against the market and there will be a reduction in the provision of advice.
“The PI insurers are a critical part of the equation, so it is largely down to what they do,” he says.
Gold standard advice
The Personal Finance Society is aiming to address both standards and capacity. It has set up the Pensions Advice Taskforce, with the aim of providing gold standard transfer advice, and is inviting firms to sign up its code of practice and nine principles.
CanScot Solutions principal Robert Reid remains cynical however: “Effectively, advisers are pulling out because they can’t get the PI cover to suit. Or you have PI insurers making it a condition that they only do a maximum number of cases a year. The other problem emanates from small regulated firms. The regulator may not have seen these firms for 12 years. For all they know they have been screwing up, but nobody has noticed.”
Reid says that given the amount of work involved his firm has a validation process, but is not sure how many firms do this in the market.
He suggests that the current situation could have a very big impact on capacity. “Pensions transfer advice could be as rare as rocking horse manure,” he adds.