The demand for defined benefits (DB) transfers has gone viral. Last year, 67,700 people reportedly transferred out of DB schemes, according to figures from The Pensions Regulator (TPR), although the number is believed to be closer to 80,000.
But not everyone is keen on DB transfers. A past experience where two equity release recommendations resulted in two complaints are among the reasons why financial adviser Neil Liversidge has stayed away from the swirling transfer fever. Suffice to say after rebutting both complaints, they were taken no further.
Mr Liversidge said: “We have seen the demand for it, but we are point blank not getting into it. We just tell clients we do not handle that kind of work.”
In principle, Mr Liversidge is in favour of a person’s right to be able to “do what they want with their money”. But he is concerned about the danger to advisers if a client comes back and says they were given poor advice on DB transfers.
The demand for transfers has led to questions over the robustness of outsourcing arrangements, protection against insistent clients and potential shortfalls in income if people take out too much in one go and end up living longer than expected.
Mr Liversidge added: “My concern is people will blow the money and come back and say they were badly advised, and the Financial Ombudsman Service (Fos) will believe them.”
DB transfers are clearly on the government’s mind. In February, the Department for Work and Pensions (DWP) launched a consultation looking at the security and sustainability of such schemes.
Closer to home, it is also of concern to the FCA. In July, the FCA banned Northampton-based IFA David Williams from carrying out pension transfers. In June, the regulator told Strategic Wealth to stop all pension-related business until a review was completed.
It is also looking at between 50 to 100 firms as part of a study into advice on DB transfers.
Data released to FTAdviser under the freedom of information rules earlier this year showed that 54 firms were voluntarily restricted from carrying out transfers.
Sir Steve Webb, the former pensions minister and Royal London director of policy and external communications said: “The FCA is concerned about outsourcing arrangements. I think I would far prefer they get people to tighten up on their processes now rather than come back in five years and complain that people didn’t do things properly.”
Neil Sadler, a chartered financial planner from Lift Financial, said his firm does DB transfers, but has a limit on how much they will take on because of the lengthy and complicated process.
Fears that the FCA or Fos will, in years to come, say people have been given inadequate DB transfer advice, is exacerbated by the perceived high-handed manner in which the Fos operates and “mixed messages” from the regulator and the government.
Advisers have long been critical that Fos’ decisions more often than not swing in the favour of the client.
Key points
• Demand for DB transfers continue as FCA takes action against adviser firms.
• Advisers remain nervous about possible customer complaints.
• The Pensions Regulator is mulling over a document that could reduce the DB to DC transfer time.
And despite the FCA’s recently published updated guidelines for advisers to protect themselves, particularly against insistent clients, this has received a mixed response.
Mr Liversidge said: “There always seems to be a mismatch between what the government says is OK and what the FCA says is OK. The government says it is OK for people to do the transfers then the FCA tries to stop it. The way the Fos is set up, it is not to protect advisers from unscrupulous clients who tell lies.”
To protect themselves against the danger of insistent clients making future complaints, adviser firms such as Lift do not complete product recommendations with insistent clients. Mr Sadler said: “We don’t think it is right to recommend a product when we don’t agree with it.”
The perceived future mis-selling risk attached to DB transfer advice is making it increasingly difficult for advisers to get professional indemnity cover.
The lengthy process of recommending a scheme is also not helped by the weight of information that advisers need to assess which scheme is appropriate for their clients.
Sir Steve said: “The process is difficult and slow because sometimes advisers do not get the information they need.
“I don’t think all schemes’ providers are fully aware that the adviser needs to see the scheme’s complete profile.”
Unfortunately, the amount of information needed is not something advisers can get away from, but a template guide with a minimum set of key points scheme providers should produce could be the way forward.
In July, TPR met with industry stakeholders, advisers, scheme administrators and industry experts to talk about a template document. The proposed template would be a full list of the characteristics of the DB pension that was under consideration for a transfer and 20 or more questions.
Following the meeting, TPR said it would consider what was discussed and look at ideas for what information might need to be included in a template. One possible outcome could be a best practice guidance to DB schemes, perhaps issued in 2018 to coincide with any DB to DC transfer rule changes the FCA might propose.
For older borrowers, as the demand for DB transfers surpasses supply, they may find themselves at a disadvantage as they struggle to find an adviser. Adviser shortage could also lead to fees increasing.
The concern that customers could complain in the future, because they took out too much money in one go and ended up with little to live on in their final years, has been heightened by the fact that people are living longer.
To address this, Sir Steve has been pushing for partial DB transfers to become a legal right. Partial DB transfers give the borrower the flexibility of getting a lump sum and a guaranteed income. However, he cautioned it is unlikely the government has an appetite for it.
“With Brexit legislation going through, the government has very little capacity to write new laws, and it is likely to want to limit itself to laws it has to pass rather than anything that might be ‘nice to have’,” he added.
“But more could be done to encourage schemes to offer partial transfers on a voluntary basis.”
Another possible solution is for government departments to be more joined up in the way they make laws affecting older borrowers, Malcolm Reynolds, DB transfer expert and managing director of pensions administrator JLT Employee Benefits, has suggested.
Mr Reynolds said: “It is not just about the pension, but people are living longer and may be in ill health. So long-term care is just as important as the pension.”
JLT Employee Benefits is now processing £750,000 of transfer payments per working hour, which equates to £100m of transfers paid out each month.
He added: “The market will explode. A huge ramp of activity is going to be seen in the next five years. I can only see it getting bigger. With people living longer, they will use equity release to supplement the pension and for long-term care. The government needs to look at all of these issues together.”
Ima Jackson-Obot is a features writer for Financial Adviser
