Advisers are being warned to consider the risks of advising clients against transferring out of a defined benefit pension scheme, in the light of recent record high transfer values.
While concerns have been so far focused on the risks of advising on DB transfers, Jon Greer, pension expert at Old Mutual Wealth, said it could be a mistake that little attention has been paid to the risks of advising clients to stay put.
He pointed out that transfer values were currently at near record highs but this was unlikely to remain the case.
As a result he said advising clients not to transfer out of their DB schemes could leave the adviser vulnerable to future complaints.
“Is there a position where a client will turn around and say, ‘You actually advised me not to transfer, and I’m not happy that you didn’t adviser me to transfer at that period of time where I could have got a high transfer value'.”
DB transfer value trends have an almost perfectly inverse relationship with gilt yields. As the latter can change very quickly (as they did shortly after the Brexit vote), transfer values can also change suddenly.
Gilt yields are currently at near-historic lows, meaning there is considerable room for rises. That would mean a decline in transfer values.
Mr Greer said this highlighted the need for advisers to make sure clients understand all the options, that they focus rigorously on the suitability of their advice, and that they keep excellent records.
“Can you prove that your advice is suitable? You’ve got to be able to clearly show that in your records. You’ve got to be very clear about why you advised in a certain way, and it’s all about making sure your record keeping is very good," Mr Greer said.
He said making audio recordings of advice sessions was one way advisers could protect themselves.
Since the introduction of pension freedoms in 2015, and the subsequent post-Brexit vote surge in transfer values, demand for DB transfers has massively increased.
This has led some to predict the FCA will conduct a thematic review on the subject.
Mr Greer, who was involved a similar review in the 1990s following a series of misselling scandals, said such a review was possible.
He said he didn’t have “any experience to suggest” that there were currently advisers giving poor advice.
But he pointed to the Financial Conduct Authority’s recent guidance, in which it stated firms focusing exclusively on critical yield were not providing adequate advice.
He said in general the FCA had been “really clear” on what it expects of advisers, adding that he did not think the regulator would budge from its position that, in most cases, transferring out of a DB scheme was a bad idea.
Susan Hill, a chartered financial planner with Susan Hill Financial Planning, agreed that the risks of advising clients to stay put were significant and little understood.
"The biggest reason for not transferring is that the client has never invested before, and is not happy with anything riskier than cash," she said.
However, she said it was "dangerous" to advise someone to stay put - especially in writing - as there was not precedent for what would happen if the client complained. She added that she doubted whether her professional indemnity insurance would cover it.
"I don't think anybody in our industry has sat down and worked out what we should be doing when a transfer is not appropriate," she said.
As a result, Ms Hill said she simply did not take on clients whom she judged were unsuitable for a DB transfer.
james.fernyhough@ft.com
