A number of advisers have indicated they may choose to turn away or refer clients seeking to transfer their final salary scheme to a defined contribution alternative to access new pension freedoms from April, despite an expected surge in business in this area.
The issue of defined benefit pension transfers erupted this week during the first of FTAdviser’s Retirement Freedoms Forums in London, with advisers conflicted on how to advise clients insistent on taking their money using the new flexibilities.
Demand for transfer requests is anticipated to increase significantly and the Financial Conduct Authority’s policy is to assume such transfers will most likely not be in the client’s interest.
Responding to a question from the audience - and as previously reported by FTAdviser last year - David Geale, the regulator’s director of policy, said it would soon be publishing work relating to a review of advice requirements around defined benefit pension transfers.
Currently an adviser must have specific permissions to advise on transfers from final salary to money purchase schemes, and the advice must be undertaken or overseen by an adviser with a relevant qualification, such as the AF3 certificate offered by the CII.
Speaking to FTAdviser, Financial Services Compensation Scheme chief executive Mark Neale said that he has been seeing a growing amount of claims arising from advice given to people taking money out of occupational pension schemes and putting it into alternatives such as Sipps.
“We’re seeing those with average size pension pots of between £20,000 and £30,000 moving these into unconventional assets. As we recently announced, we are now in a legal position to offer compensation on eligible claims.”
At FTAdviser’s Birmingham sister event, Chris Daems of Principal Financial Solutions said in most cases his firm would simply turn away such business due to the risks involved.
Ian Highton, partner at Essential Financial Advisers and an attendee at the event, commented that based on responses from other delegates most advisers will walk away from DB transfers due to compliance risk and professional indemnity insurance concerns.
He added that the FCA’s standpoint on DB transfers not being in client best interest means that advisers do not seem interested in taking on these types of risks.
David Hearne, wealth management adviser at Satis Asset Management, said he would avoid ‘insistent’ customers as he wants lifelong planning relationships and that this would be likely to be no more than transactional support.
“My broad view with DB to DC transfers, and the approach I take, is one of staying sceptical on behalf of your client,” he told FTAdviser.
“Rather than pursue a transfer until you find a reason you shouldn’t, I prefer the opposite approach; you shouldn’t even consider them until you find a very clear reason you should.”
Victor Sacks, an IFA at Ringrose Grimsley, noted that representatives of Prudential suggested that advisers were missing out if they did not get involved with DB to DC transfers.
“My personal view is that I would sooner refer to a third party, so as to do so at arms length and demonstrate total independence with no bias,” he stated, adding that he prefers to review things on a case-by-case basis.
This was exactly the term used by the FCA’s acting head of savings and investments Maggie Craig at the Birmingham forum when asked about whether or not advisers should turn away clients who wish to defy a recommendation, adding that “it isn’t possible to have a blanket rule on this”.
A survey conducted by Hargreaves Lansdown among 1,037 people aged 40 and over 65, found that one third of respondents indicated they either intend to transfer their DB pension or were as yet undecided.
Given active members are unlikely to transfer until they cease accruing benefits, come 6 April there could potentially be 1.7m individuals - one third of 5.1m deferred members - evaluating their options.
Nathan Long, head of corporate pension research at the firm, said: “Whilst these changes may prompt many to take a second look, in reality the majority of members are likely to be better off keeping their final salary scheme intact. Some may benefit from transferring, but this is the exception and not the rule.”
peter.walker@ft.com
