Schemes’ endgame decisions could be hit by IFA shortage

Over the past few years, more DB schemes have considered endgame solutions, which normally include liability-management exercises, such as incentivising their members to transfer out.

This has translated into the bulk annuity market breaking records, with buyout deals more than doubling in 12 months to £34bn at the end of June, according to data from LCP.

However, there could soon be a constrain for pension funds that are aiming to reach a position to be able to buy out, as a shortage in the financial advice market and a more prudent stance from advisers means that enhanced transfer values exercises are not as effective as they once were.

For John Reeve, director of Cosan Consulting, there is no doubt that the take up on transfer exercises has fallen dramatically this year.

If schemes are relying on transfer take-ups to close the gap to get them to an endgame solution, there is no doubt that it will be harder to do

John Reeve, Cosan Consulting

In a particular scheme the consultancy works with, the take up in past exercises was around 20 per cent, and it is now down to a single figure.

“This is due to several issues, but the main one is that financial advisers are getting much more prudent about who they are advising to transfer. The new rules from the Financial Conduct Authority make them even more reluctant to advise to transfer out,” he said.

Regulator concerned about pension transfers

In June, the FCA published data that showed that between April 2015 and September 2018 69 per cent of clients had been recommended to transfer.

The regulator has been concerned that companies 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.

A month later, the financial watchdog proposed a ban on contingent charging – a structure where the adviser only gets paid if the recommendation is to transfer out – with a goal to reduce concerns about a conflict of interests.

The FCA also published a consultation on a new type of advice – abridged advice – which is expected to weed out the cases in which a pension transfer will not be suitable.

‘Trouble brewing’ in the IFA market

Mark van den Berghen, head of liability management at Buck, argued that “there is trouble brewing when it comes to IFA availability”.

He said: “Proposals within the FCA’s ongoing consultation, including a potential ban on contingent charging and the need for an abridged advice stage, are making smaller market players nervous, with some firms not committing to new exercises until the consultation response is published.

“It is also possible that mid-size firms will take the view that they are better off focusing on other advisory areas.”

Mr van den Berghen noted that the demand for bulk liability management exercises is expected to increase “once certainty in the market returns, especially once the path of guaranteed minimum pensions equalisation is more well-trodden”.

“As a consequence, some DB schemes may be forced to carry out exercises at inconvenient times – for example, over holiday periods,” he noted.

This could have a knock-on effect “on engagement and member take-up, meaning the exercises ultimately do not achieve their objectives and could result in a worse experience for members in the short term,” he added.

Cosan’s Mr Reeve noted that schemes are trying other approaches to reach high take up on pension transfers, such as quoting transfer values when their members get to 55 years old, to make them aware of their rights.

“It is a bit of a softer-touch exercise, but [it reminds] people that they can transfer,” he said.

However, he does not see a bright future for this exercises. “If schemes are relying on transfer take-ups to close the gap to get them to an endgame solution, there is no doubt that it will be harder to do,” he added.

Financial advisers hit by insurance issues

In April, the FCA increased the compensation limit of the Financial Ombudsman Service from £350,000 to £150,000, which means financial advisers could now face a higher bill if a complaint against them is successful.

This has led to professional indemnity insurers hardening the circumstances in which they cover financial advisers, especially when it comes to the DB transfer market.

Sir Steve Webb, former pensions minister and director of policy at Royal London, agreed that there is “likely to be a serious shortage of supply in this market, and the abolition of contingent charging and the tightening of the professional indemnity market will undoubtedly make matters worse”.

However, he had a more positive view on the impact this will have on pension schemes.

“What I suspect will happen is that the market will segment – even more – with some larger advice firms specialising in working with big corporate schemes, rather than advising individuals who approach them one-by-one.

“These larger firms seem to be finding it easier to get professional indemnity cover than smaller firms who may only do a small number of transfers a year, and there are considerable cost advantages in being the sole or main adviser to all the members of a large DB scheme.”