A freedom of information request to the Financial Conduct Authority by Kroll revealed that 34,053 people were advised to transfer out of their DB scheme in the 18 months to September 2021.
This compared to 49,456 reported to have been advised to transfer out in the previous 18 months.
Mark Turner, managing director in Kroll’s Financial Services Compliance and Regulation practice, said the number of customers advised to transfer out of their DB pension scheme in 2021 was far lower than in previous periods.
“Reducing this figure has been a key aim of the FCA, so it’s positive to see that regulatory intervention seems to be working,” he said.
Crackdown on DB advice
The data showed a decline in transfer recommendations after the FCA moved to crackdown on unsuitable advice in this area and introduced its contingent charging ban
In October 2020, a ban on contingent charging came into effect with a view to remove the conflicts of interest which arise when an adviser only gets paid if a transfer goes ahead.
Only consumers with certain identifiable circumstances, such as those suffering from serious ill-health or experiencing serious financial hardship, are exempt.
At the same time as the ban, the FCA introduced a new form of advice. Abridged advice sits in between triage and full transfer advice but can only result in a recommendation to not transfer out.
It begins with an introductory chat with the client, where the adviser can get some high-level information about their circumstances to then determine that they are not a viable candidate for a transfer.
Last year, data from the FCA, obtained by LCP through an FOI request found more than two in three members who were charged on a contingent basis ended up transferring their defined benefit pension.
The data showed there was a “significant” correlation between the adviser charging structure and the extent to which those who seek DB transfer advice ended up transferring out.
Turner said despite these new rules, the percentage of customers being advised to transfer remains high – close to two thirds.
He said: "This, however, could simply mean that the triage process is working as intended and that customers who previously might have been advised not to transfer are now simply not progressing past the initial guidance phase to receive full advice.”
Turner added that while the initial data looks positive, the potential risk posed by unintended consequences needs to be considered.
“If more regulatory attention means that advisers withdraw from this market and no longer offer transfer advice, then consumers could start to suffer.
“If the market shrinks, then customers simply may not be able to get access to high-quality and affordable transfer advice in the future. We may need to wait a little longer to fully grasp the long-term effects.”
Source: FCA
Matthew Connell, director of policy and public affairs for the Personal Finance Society, said transferring out or staying in a DB scheme depends very much on personal circumstances, which is why it is vital to speak to a financial adviser.
He said: “The risk of transferring out of a DB pension is you lose out on a guaranteed lifetime income and may run out of money in later life.
“A range of factors has combined in recent months to drive down volumes in the defined benefit pension transfer market. Reduced access to affordable advice, transfer values peaking plus the lockdowns also resulted in reduced activity.”
Other factors play a role
Simon Harrington, head of public affairs at Pimfa said: “Prior to its regulatory interventions in the market, the FCA stated that the number of DB transfers occurring was too high – a principle which we broadly agreed with given the level of suitability of the transfer advice given prior to its interventions.”
However, he explained that in considering the state of play in the market today, it is also important to consider the other drivers which have contributed to a reduction in the level of DB to DC transfers.
“There is clearly less appetite among firms to offer these services – and a significant number have subsequently dropped their permissions,” he said.
“As well as a tougher approach to supervising DB transfers, we attribute this to the significant tail risk that this sort of activity presents, as well as broader cost pressure associated to their ability to gain affordable PI cover.”
Harrington explained that going forward, Pimfa has significant concerns that the DB transfer market might present itself as a new revenue opportunity for claims management companies.
He said: “There continue to be stories associated to pensions mis-selling – the most obvious example being British Steel – and while these consumers should be compensated for the poor outcomes they receive, it is important to ensure that other individuals who are currently very happy with their transfers are not seen to be, or are provided with, a reason to make claims against firms and advisers who delivered good and suitable transfer advice with the highest standards of professionalism.”
sonia.rach@ft.com
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