The events of 2019 could see the death of the defined benefit transfer market, experts have predicted.
Andrew Tully, technical director at Canada Life, told FTAdviser 2019 would be remembered as the year the final salary transfer market “fell substantially” after the regulator cracked down on unsuitable advice and the cost of insurance for advisers rocketed.
AJ Bell’s senior analyst Tom Selby agreed, adding that transfer activity was likely to continue flattening out in 2020 as regulatory scrutiny and rising professional indemnity costs continued.
The FCA published in June the results of its survey of 3,015 firms between April 2015 and September 2018, concluding that too much of the advice on DB transfers it has seen was "still not of an acceptable standard".
It also voiced concern about the volumes of recommendations, with 69 per cent of clients having been recommended to transfer.
The watchdog found the average transfer advice value was £352,303, equivalent to a total value advised on of £82.8bn. This included both actual transfers and advice against it.
The FCA is concerned that firms are recommending that large numbers of consumers transfer out of their DB pension schemes despite its stance that transfers are likely to be unsuitable for most clients.
Mr Tully said: “The decline in the market is an inevitable consequence of greater regulatory scrutiny.
“While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them.
“Otherwise we run the risk of stopping people exercising control over their pension savings, and preventing some from achieving the best outcome.”
Mr Selby also thought the industry could “swing” too far against DB transfers. He said: “Clearly the big danger here is that the market swings to the point where people who would be better off transferring are simply unable to access the advice they need.
“The regulator will need to consider this potential area of consumer detriment in formulating its final proposals.”
Rising PI cover is also a key reason the market has dwindled. From April 1 the FCA hiked the ombudsman compensation limit from £150,000 to £350,000, spooking PI insurers that saw DB transfers as a highly risky business to insure.
Mr Tully said: “It is the thorny subject of PI insurance which is, perhaps, the greatest challenge for many advisers, and the issue which could lead to a shortage of access to affordable and professional advice.”
Earlier this month Personal Finance Society boss Keith Richards warned the shrinking professional indemnity insurance market was “past the point of critical” for advisers.
He said the professional body only knew of two insurers now writing new cover for advisers who advise on defined benefit transfers.
imogen.tew@ft.com
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