Broadstone’s technical director David Brooks details how trustees must help scheme members to avoid bad transfer decisions as the regulator takes a ‘Green Cross Code’ approach.
It identifies that members should not be encouraged to make decisions to transfer their valuable pension benefits away from the arrangement due to concerns with the sponsor. The FCA repeats this view that those providing advice should start with the position that a transfer is unlikely to be in most people’s interest.
In recent memory, similar messaging was issued in October 2020 for members of the Rolls-Royce DB scheme, and more recently regarding the Old British Steel Pension Scheme when it exited the Pension Protection Fund in December 2021. Of course, warnings were made at the beginning of the pandemic to avoid rushed decisions being made.
These warnings to members are notable for their rarity. Is that because TPR and the FCA only see the risk on larger schemes?
Like the Green Cross Code man, TPR has provided guidance, but may not be there for you if you are a run-of-the-mill pension scheme
No, but the risk is heightened as the numbers of employees and members impacted can be big and the opportunistic scammers will target high-profile cases. It is right that they issue warnings with the regular reminder that transferring from a DB scheme is unlikely to be in the best interest of the member.
In this context, we should also note that due to the actions of some independent financial advisers when British Steel got into difficulties in 2017, there now has to be a redress scheme that will eventually see some compensation being paid to members who transferred out when it was clearly not in their best interests to do so.
TPR failed to provide the relevant warnings then and the FCA failed to protect members when preyed upon by unscrupulous regulated advisers.
Rising professional indemnity insurance costs means fewer and fewer good-quality advisers are operating in this space, the result of which being that members will be more likely to fall into the clutches of an adviser without their best interests at heart. This has been a sea change from the heady days of 2017 and 2018 when DB transfers were all the rage.
Trustees need to take responsibility
Like the Green Cross Code man, TPR has provided guidance, but may not be there for you if you are a run-of-the-mill pension scheme. However, like we learned from the Green Cross Code man — trustees should take responsibility for their schemes as if they were a high-profile employer.
Trustees should be considering what they would do if their scheme and sponsor experience difficulties.
It is a simple fact that TPR is often only aware of issues because of the press coverage. Therefore, it is also important that trustees leverage the local experience of their member-nominated trustees.
Just because employer difficulties do not reach the national papers does not mean it will not make local press headlines, which will still drive fear or worry into the members. Being alert to this is a crucial role for member-nominated trustees. They can be the eyes and ears of the trustee board, identifying issues that the membership is seeing.
What trustees can do
Rules have been put in place to make it easier for trustees to stop transfers when a potential scam is identified, but no system is fail safe and the scammers will continue to find ways around the rules.
We are also not just talking about scams, it is also people making bad decisions based on poor or unethical advice. Trustees have no legal grounds to stop transfers in those circumstances, but there are tools to help prevent them.
What can trustees do to protect their members?
Ensure they have the sponsor monitoring in place to be alert should their sponsor get into difficulties. This can be official information-sharing memorandums, as well as keeping an eye on local press and member concerns.
Consider the communications that could be issued to members. We know members do not read all of the materials that trustees issue, but regular warnings of scams or poor advice can trickle through to blunt the hooks used by scammers or the unethical.
Consider contingency plans to communicate with members should you need to do so quickly to remind them of the safeguards in place for their pension.
A growing number of trustees are looking to appoint a preferred IFA. This would allow members to choose an adviser from a pre-approved panel. This reduces the risk of members choosing from a wild west of independent provision and gives them the confidence and security many are looking for.
Trustees, take inspiration from TPR and look right, look left, look right again.
David Brooks is a technical director at Broadstone
