It pays for schemes to beat the rush when looking for an independent financial adviser to handle projects such as liability management exercises, says Buck’s Mark van den Berghen, adding that in the current regulatory environment due diligence on IFAs is paramount.
A number of high-profile regulatory changes, sharp rises in the cost of professional indemnity cover, and the Financial Conduct Authority withdrawing permissions have forced smaller companies out of the market and are expected to encourage those that remain in the market to consolidate into a dwindling number of larger businesses.
Consolidation of the larger IFA firms would further limit their resources and reduce their capacity for liability management exercises
Pension schemes are reliant on IFAs for a range of services, from everyday business to huge bulk exercises. As such, if current trends continue, adviser shortages could make life more difficult for scheme administrators and impede their ability to serve their scheme members.
Since at least early 2019, the IFA market has been contracting at an alarming rate, driven by two main factors: increasing regulatory concerns and rising costs.
A shrinking market
In April 2019, the FCA announced that advice companies would be expected to need to increase their professional indemnity cover to ensure they would be able to meet increased potential charges from the Financial Ombudsman.
Since then, the cost of PI cover has grown, and this has disproportionately affected smaller schemes that are unwilling or unable to pay these increased premiums. As a result, the increased cost of doing business has forced some smaller companies to either leave the market, become an appointed representative, or consolidate.
Additionally, following a string of high-profile pension transfer scandals, the regulator looks poised to ban contingent pricing when the results of its latest consultation are published. This will mean companies need to think carefully about how they charge in future and could accelerate flight from the market.
As the regulatory noose tightens and schemes must devote more time, effort and money to ensuring they are compliant, consolidation becomes an even more attractive strategy. From the thousands of IFA firms in the market that schemes can currently engage with, we could see as few as 1,000 or below when the FCA completes its investigations.
Trouble ahead
This market shrinkage is bad news for members of pension schemes and will probably mean schemes are left with fewer options and slower service, all at a higher cost and with longer lead-in times.
Consolidation of the larger IFA companies would further limit their resources and reduce their capacity for liability management exercises, meaning that schemes will face longer lead-in times for any planned projects. Furthermore, as competition in the adviser market shrinks, fees may rise both for projects and everyday work, as IFAs look to raise prices and recoup more of their costs.
The experience of members may also suffer if their scheme’s current appointed provider withdraws from the market (as we saw with LEBC in 2019), forcing the scheme to appoint new providers – inevitably within short timescales.
The overall service provided by consolidated providers may suffer as overworked IFAs struggle to keep up with demand, and these changes may also expose schemes to a wide array of damaging knock-on consequences. For instance, reduced IFA capacity may force schemes to increase their guarantee periods for transfers, which in turn may expose the scheme to gaming by members.
What schemes can do
While schemes are at the mercy of the market, if trustees and advisers are canny and well-prepared, there are measures they can take to limit the damage. As conditions become more difficult for schemes, the importance of careful forward planning only increases.
With shortages in the market are only likely to worsen, it is important that schemes do not delay when it comes to the bulk projects they have planned for this year. Schemes must act early to ensure they get the best deals available, in terms of both price and timings.
Regulator updates pension transfer guidance for trustees
Defined benefit trustees will need to contact financial advice firms to check if the adviser listed on members’ transfer documents is employed with them, new guidance from the Pensions Regulator stipulates.
At the same time, schemes should ensure they have done their due diligence on IFA firms. Trustees should be asking their advisers to regularly monitor the IFA market to make sure they do not face any unwelcome surprises with their current providers.
Just as importantly, schemes should be listening closely to any news coming out of the FCA and the Pensions Regulator, which could make conditions harder.
Vigilance, organisation and clear strategic planning will serve schemes well.
Mark van den Berghen is principal and senior consulting actuary at Buck
