The FT Adviser have recently published this article written by our own Managing Director Tim Flippance.
Following the release of a recent survey by Aegon, it has become increasingly clear that more and more IFAs are rejecting the defined benefit transfer market to concentrate on other, less ‘risky’ areas of financial advice.
This will of course come as no surprise to many, given current market conditions and the wide-ranging changes that have impacted the industry over the past few years. In fact, this is a trend that has been happening for some time.
After all, although it is true that for most members a DB transfer is unlikely to be suitable, in certain circumstances and for a limited number of clients, it can still be the right option.
Over the past year considerable increases in interest rates/gilt yields has seen average transfer values drop, substantially in some cases. This has led to a dip in demand from clients that would previously have been motivated by potentially generous cash equivalent transfer values.
In the medium to long-term, we are probably going to again see an increase in the demand for DB transfer advice.
However, the traditional reasons why a client may wish to transfer, in short ‘flexibility, control and death benefits’, have not changed.
In addition, all other factors being equal, as a scheme member gets closer to retirement age and their benefits increase, their transfer values will likewise increase.
Meanwhile, long-term interest rates/gilt yield falls would also generally push transfer values back up.
With all of this in mind, it is fair to assume that at some point, most likely in the medium to long-term, we are probably going to again see an increase in the demand for DB transfer advice.
XPS Transfer Value Index (estimated cash transfer value of a pension of £10,000 a year in £000s)*
XPS Scam Flag Index (%)
Source: XPS Pension Group
DB transfers – a lot of work for an uncertain outcome
The Financial Conduct Authority’s ban on contingent charging introduced in January 2021, along with a raft of further rules around the provision of DB transfer advice, has seen a typical DB transfer timescale nearly double in the past three years, from around four months to eight months, from initial enquiry to completion of a transfer.
Many advisers have adopted the ‘gold standard’, which requires the provision of ‘triage’ early in the advice process, while also choosing to offer abridged advice prior to full advice, often at no additional cost.
The net result of all this is mostly positive; clients are likely to be better informed prior to making an irreversible decision, while advisers themselves can be more confident that their clients comprehend the risks.
With the difficulties of applying FCA rules and guidance, it is not surprising that an increasing number of IFA’s will simply not want to service this area of advice.
However, from a purely time and efficiency standpoint, this will have certainly had an impact on this area of advice. Most clients upon receipt of this extra information will want to discuss the details and understand more – particularly when deciding whether to proceed to full advice.
As such, for many advisers, undertaking a large amount of work before reaching the ‘chargeable’ part of the process, will have seen them reassess DB transfers as an efficient use of their valuable time.
In recent years, the cost of PI, particularly where this includes DB transfers, has spiralled drastically.
To make this extra cost worthwhile, firms offering DB transfer advice will realistically need to be providing this to a reasonably large number of clients.
In fact, this will likely need to be near the maximum allowable under their PI terms. For most small and even medium-sized IFA firms, it may simply not be financially viable anymore.
FCA and Fos
As an added pressure, the FCA has indicated that they are keen to reduce the number of non-specialist, smaller IFA practices operating in this area of advice.
Instead, they appear to want a few specialist firms that they can regulate more closely.
In addition, retrospective complaints are becoming increasingly common. Many claim management companies, having seen the well of PPI claims dry-up, have turned their attention to DB transfers.
These complaints are mostly generic ‘bad advice’ fishing exercises and in most cases the advisers will not uphold the initial complaint.
It has become self-evident that the risk for the client undertaking the transfer is matched, or even exceeded by, the IFA who has helped them.
Of course, with literally nothing to lose and no cost involved for the complainant or their CMC representative, it is a virtual certainty the complaint will end-up with the Financial Ombudsman Service.
Thereafter, even a successfully defended complaint can result in the loss of thousands of pounds in time and Fos fees.
It is worth mentioning as well that, unlike IFAs providing advice, Fos adjudicators do not need any specialised qualifications in DB transfers and this may be reflected in the inconsistency in some of their decisions.
Overall, with the difficulties of applying FCA rules and guidance, and concerns about how Fos may adjudicate future complaints and the lack of any mechanism for challenging their decisions, it is not surprising that an increasing number of IFA’s will simply not want to service this area of advice.
Finally, on a more practical level, there is also the requirement for all pension transfer specialists to complete at least 15 hours of pension-transfer-specific continuous professional development to maintain their statement of professional standing.
As is well known, the starting point for all DB advice is that a transfer is unsuitable, unless it can be clearly demonstrated to be in a client’s best interest. However, this is quite rightly a ‘high bar’ to achieve in a lot of cases.
Given this, it is not surprising that a significant proportion of clients that receive a negative recommendation will still wish to transfer against advice.
Of course, the decision to accept an ‘insistent’ request from a client is far from clear-cut and comes with its own challenges.
The FCA has set out its guidance on dealing with insistent clients and stated that a firm must be able to evidence that the client understands that the firm has not recommended a transfer, the reasons why a transfer was not recommended and the risks of proceeding with a transfer.
The firm must then have a clear record, in the client’s own words, that the client understands they are proceeding against advice and that the transaction is being carried out at their request.
It is then down to the IFA or pension transfer specialist to determine if the case can proceed on an insistent basis, even where the client has expressed a clear desire to still do so.
Unfortunately, even if this process is clearly followed the IFA has no certainty that they will be protected against any future complaint as the firm is still ultimately responsible for the transfer – even on an insistent basis.
Given the inherent difficulty in judging whether to accept such a request, best practice is likely to include having a set of principles that each insistent case can be judged against.
These may include, but not be limited to, the following examples:
- A substantial lifetime loss if a transfer was to proceed.
- Inability on the part of the client to demonstrate an understanding of the risks of a transfer.
- Inability to demonstrate an understanding of the guarantees that would be lost.
- Vague or unclear objectives that the client is unable to expand upon.
- Objectives that are of questionable importance.
- Suspicion that the client may have been coerced or influenced by a third party.
- A refusal by the client to provide key information about their circumstances.
- Evidence of financial irresponsibility eg a lack of savings/substantial unexplained debts.
- A transfer would cause a shortfall in retirement income needs
However, rejecting an insistent client is also not without risk. For example, where transfer values are falling, as they have over the last year, an adviser must be prepared to defend their decision to reject an insistent client.
This is because that same client may now be questioning the refusal having seen their transfer value fall considerably in the past 12 months.
It is almost inevitable that in years to come only a small proportion of IFAs will continue to operate in this market.
Of course, PI restrictions prohibiting ‘insistent’ transfers for some IFAs may make this academic for many firms.
The only question then becomes, how, and at what stage in the advice process, do you explain this restriction to your client. Certainly, treating customers fairly would dictate that this should be prior to them opting for full advice.
So what about clients?
Recent big increases in inheritance tax income for the government, the ‘pent up’ demand following the drop-off in transfer enquiries since last year, the prospect of transfer values rising in the longer term, and growing awareness of annuity rate rises mean it is not inconceivable that demand for DB transfer advice could grow again.
At the same time, it is almost inevitable that in years to come only a small proportion of IFAs will continue to operate in this market and it will mostly be serviced by a limited number of specialist firms.
The risks are clear; an increase in demand for advice and a big reduction in advisers willing or indeed able to undertake this, and complicated variations in the advice offered and charging models, could lead to many members being simply left unable to obtain regulated advice.
This could, in particular, hit those clients with CETV’s between £30,000-£100,000 where the need for advice is high but availability is virtually non-existent.
There is no doubt that DB transfer advice carries a high level of risk and of course this has always been the case. However, in the past few years it has become self-evident that the risk for the client undertaking the transfer is matched, or even exceeded by, the IFA who has helped them.
For many clients, the ostensibly ‘binary’ decision to transfer – either do or do not – may initially appear simple. But in reality, aside from those in the most extreme circumstances of significant wealth or serious/terminal health, this is not the case.
For most, it is a complex decision involving many factors that must be weighed carefully, and the availability of a qualified, experienced, insured and willing IFA to help them will be even more limited in the future.