Trustees on the hook as ‘high street’ advice market goes into free fall

In a new report, co-authored by Aviva, the consultancy company argued that demand for transfers surged after the introduction of pension freedoms in 2015, a trend reinforced by an increase in transfer values and a permissive regulatory environment.

However, recent regulatory changes have had the opposite effect on the availability of advice, with the number of high street financial advisers prepared to offer their services with respect to defined benefit scheme transfers collapsing.

“In the first phases of pension freedoms there was, not surprisingly, a growth in the number of advisers recorded as being able to offer DB transfer advice. But the number of advisers still active in the market has since fallen back,” the report explained.

Trustees need to do ‘due diligence’ on the advice firm(s) they appoint. This includes making sure they are financially robust, are properly qualified, don’t have a long list of complaints with ombudsmen, etc

Steve Webb, LCP

A survey of high street providers, defined as advisers whom scheme members can seek out directly as opposed to those who have been appointed by schemes themselves, found 116 of the 217 respondents had stopped providing advice for DB transfers.

Of these, almost 80 cited issues around personal indemnity insurance, while more than 60 cited the “attitude of regulators” as reasons for dropping out of the market, while the abolition of contingent charging was also cited as a factor.

“One of the main concerns with regulators is a perception that measures designed to tackle ‘rogue’ advisers (‘cowboys’) end up penalising legitimate advisers, adding to their costs and regulatory burdens,” the report explained. 

“There was also a feeling that a blanket presumption against transfers (as a starting point) makes it harder to recommend a transfer, even when the adviser strongly believes this is in the client’s interest in a particular case.”

Dissatisfaction was also expressed with the role of the Financial Ombudsman Service (and the increase in FOS compensation limits), “particularly when it comes to evaluating claims for poor advice”, the report stated.

“Some advisers felt that the FOS assessment process could override thorough and detailed advice based purely on a relatively superficial examination of a case,” it continued.

“The overwhelming message from advisers who have left the market is that a combination of rising PI costs (and a perceived unreasonable/irrational approach by PI insurers) and regulatory hostility to DB transfers makes it an unattractive market to be in.

“These advisers generally felt that a shrinking in supply of advice, coupled with a ban on contingent charging, would simply mean fewer people would be able to take advantage of ‘pension freedoms’, even if in their individual case it would clearly be beneficial for them to do so.”

Unsafe assumptions

While the legal requirement to take advice on transfers of more than £30,000 was designed to ensure that members give proper, informed thought to their decisions, LCP warned that the regulatory model was “based on the assumption that high-quality, impartial and affordable advice is readily available”.

The report argued that this assumption is not as safe as it might once have been.

“In particular, the supply of ‘high street’ advisers willing and able to provide advice on DB transfers has halved in just three years, and our survey suggests that this contraction is set to go further,” it stated. 

“At the same time, the cost of advice has risen (notably because of rising PI insurance costs) and members are expected to fund that advice up front now that ‘contingent charging’ has been abolished. As a result, fewer members are seeking transfer values from their scheme and fewer still are going ahead with transfers, except among those with the largest pots.”

Though high street advisers continue to be the “primary source of help” for those seeking transfers, their number is declining and the prevalence of scheme-appointed advisers has emerged as a “partial solution” to the resulting gap, LCP said.

“But there is no doubt that more needs to be done to revive the wider advice market in this space. The high street advisers who responded to our survey were clear that two things would need to change for them to return to (or even remain in) the market,” it continued. 

“PI insurance would need to become more affordable and predictable, and the approach of regulators would need to be less hostile. There is no obvious sign that either of these conditions is likely to be met in the near future.”

The pressure is then placed on schemes and trustees to “step into the breach”.

“It is increasingly apparent that trustees who do not act to help members to source suitable advice about a potential pension transfer are also taking a risk,” the report continued. 

“Given the difficulties for members in sourcing their own affordable and dependable advice, especially where they do not have an existing relationship with a financial adviser, members may increasingly turn to their scheme for help.

“Where schemes do not act and members end up with poor outcomes, members may increasingly ask questions of schemes and employers as to why more help was not provided, particularly in the context of the imminent new anti-scam regulations expected from [the Department for Work and Pensions], which will put a greater onus on the trustees of schemes and may have a further significant impact on this market.”

Trustees must do due diligence

LCP partner Sir Steve Webb told Pensions Expert that the Financial Conduct Authority expects schemes to appoint independent companies to give transfer advice, “not one which (for example) only advises its own products. This is to avoid the risk that the trustees are in effect ‘recommending’ a particular provider’s products”.

“This does automatically limit the pool in which schemes are fishing. Having said that, there are a decent number of high-quality IFA firms who do a lot of this sort of work and there is lively competition between them for scheme appointments,” he said.  

“The seven we surveyed in depth for our research had managed to cope with things like the rising cost of PI cover, partly because in many cases they are part of a larger group which can support them in a way that a lone ‘high street’ IFA is not.”

The trend towards scheme appointments could be “a good thing” if trustees “are making a positive choice” to improve things for members, but would be worrying “if this is simply a sign that high street advice is dwindling away”, Webb continued.

“I say this because, for the foreseeable future, many schemes won’t have an advice firm relationship set up, so members of such schemes really do need there to be a thriving high street advice industry. It’s also good for members to have choice, so that they are not forced to use the adviser the scheme has chosen.”

He added: “Trustees need to do ‘due diligence’ on the advice firm(s) they appoint. This includes making sure they are financially robust, are properly qualified, don’t have a long list of complaints with ombudsmen, etc.

“It also includes ongoing due diligence, as key personnel at advice firms can change and a firm that was appropriate when you first appointed them may not have maintained those standards.”