The exodus from DB schemes continues to raise concerns

The ban on contingent charging — where charges for advice are only made after the transfer of the pensions — was followed by a record fall in DB transfers in the fourth quarter of 2020.

More recently, the Financial Conduct Authority described one adviser as “seriously incompetent”, before issuing him with a fine of £1.3m for providing hundreds of clients — including 183 British Steel Pension Scheme members — with poor DB pension transfer advice.

Last year, a freedom of information request made by Buck found that the FCA had concerns that 76 per cent of companies operating in the DB transfer arena may have provided potentially harmful advice.

Protecting the scheme does not mean leaving the member to fend for themselves. If a member is scammed, then the scheme has also suffered a loss

While the regulator has taken steps to protect pension scheme members from detrimental advice, there remains much work to be done.

Generally, transferring out is not a good idea

The simple fact is that transferring out of a DB pension scheme will not usually be in the best interest of most members.

Yet, according to recent FCA data, many members continue to transfer. Even when triage services are deployed to help members identify early in the process where a transfer is not in their best interest, 43 per cent continued with advice and were recommended a transfer between October 2018 and March 2020.

This is far too high and even more worrying — only 1 per cent of these transfers were into a workplace pension scheme.

There are independent financial advisers who work to exceptionally high professional standards and always act in their clients’ best interests. However, few of them are working with schemes to ensure members get sound advice on whether a transfer is suitable for them.

A recent poll conducted by Buck found that only 15 per cent of schemes had appointed an IFA, the same amount who had actively decided not to.

This means that eight in every 10 schemes have not appointed an adviser, and the vast majority (64 per cent) are undecided about whether they should or not, despite the new rules being in place for almost a year.

Sharks still swim in smaller pools

The pool of advisers who can advise on DB transfers continues to shrink. But that does not mean only the good ones remain active.

Almost one-fifth (20 per cent) of advisers still operating in this market provided clients with a personal recommendation to transfer from the British Steel Pension Scheme in 2017 and 2018, when the FCA says “high levels of unsuitable advice” was provided to members.

Trustees are required to act impartially and in the best interest of members, but they are under no obligation to advise members and must not stray into providing anything that might be considered regulated advice.

Trustees are also under no obligation to help members navigate the transfer minefield, nor help them maximise their rights or make the best selection.

Pension schemes are being asked to juggle tighter regulations with rising costs, and they too would have to select the right adviser from a shrinking pool of advisers.

This is in part why trustees have been reluctant to suggest the use of an IFA, either because they are afraid of being liable for the advice, feel under pressure to pay for the advice, or because they believe the choice is for members and members alone.

Where the scheme is undertaking a bulk exercise such as a pension increase exchange or enhanced transfer valuation, they are liable for any advice and must pay for it, too.

However, recent guidance from the Pensions Regulator and the FCA clarifies expectations of the trustee’s role in members receiving advice and may offer some comfort about the appointment of an adviser.

IFAs as protection for members and the scheme

Good governance is of paramount importance. A scheme-appointed IFA can provide a definitive answer on — or corroboration of — the suitability of a transfer. This takes the guesswork out of the adviser’s motivation, avoids the difficulties of so-called ‘abridged advice’, offering comfort to the scheme.

Protecting the scheme does not mean leaving the member to fend for themselves. If a member is scammed, then the scheme has also suffered a loss. The law is changing here, placing greater emphasis on schemes to check for fraudulent activity, particularly around transfers.

This obligation is not necessarily a burden, but the opportunity to see a transfer specialist as an additional hygiene factor.

The IFA operates outside the administration function and can help approve suitable transfers and identify potential scams. After all, a scam is costly to the individual and in terms of a loss of scheme assets. But the reputational risk to the trustee may far outweigh the IFA’s fees.

By embracing a DB transfer adviser, schemes can work in tandem with an expert specialist to augment and reinforce their governance protocols to protect all members, including those who may seek to leave its protection.

Mark van den Berghen is principal and senior consulting actuary at Buck