3 October 2021
A major new research report undertaken jointly by consultants LCP and insurer Aviva has found that access to financial advice around pension transfers will continue to decline unless action is taken by Regulators and Pension Schemes.
The research was in two parts:
- A major survey of financial advisers, with responses from more than 200 advisers currently or recently active in giving DB transfer advice;
- In-depth interviews with 7 leading advice firms regularly appointed by pension schemes to provide advice to members;
Research by the Financial Conduct Authority (FCA) had already shown that the number of advisers with permission to provide DB transfer advice halved from just over 3,000 in Autumn 2018 to around 1,500 at the start of 2021. But this new survey suggests that even amongst those still active in the market, around 1 in 3 were unsure that they would still be providing transfer advice in a year’s time or had already decided to pull out. Amongst this sample of ‘high street’ financial advice firms, the biggest reasons given for pulling out were the cost and availability of obtaining Professional Indemnity (PI) insurance, the financial risks associated with providing transfer advice and the perceived hostility of regulators to DB transfers. Some firms also cited the abolition of ‘contingent’ charging in October 2020, which means that members now have to pay for advice whether or not they are recommended to transfer.
Partly in response to challenges for members in obtaining affordable advice, growing numbers of schemes are appointing IFA firms for members to use if they wish. In many cases this advice is either free (i.e., paid for by the trustees/employer) or considerably cheaper than if members source the advice themselves. For this paper, LCP interviewed seven such IFA firms who between them provided advice on over 1 in 5 DB transfers in the last year.
All of these ‘scheme-appointed’ IFAs said they were seeing a growth in business, but the exact arrangements varied from scheme to scheme. In some cases, schemes made advice available free of charge to members, whereas in others the scheme paid for the set-up of the arrangement and members then paid the ‘marginal’ cost of providing advice. This was still generally substantially cheaper than if they sourced the advice themselves.
Other key findings from the research about the current state of DB transfer advice were:
- With regard to *why* members want to transfer, health concerns had become far more important compared with a similar survey three years earlier; it may be that the Pandemic has caused members to think about what would happen to their pension rights if they were to die and believe that transferring into a Defined Contribution arrangement will preserve more of their pension for their heirs on death;
- The advisers interviewed said that they often recommend using part of the transferred funds to buy an annuity. This can help to provide a guaranteed income floor for those who have given up guarantees by leaving their DB scheme, whilst allowing them greater flexibility with the balance of their funds;
- Most scheme advisers said that new rules requiring them to benchmark the destination of transferred funds against a low cost workplace pension had had little effect; many of those transferring are already at retirement so a workplace pension would not be relevant, whilst larger advisers can already negotiate good terms on transferred funds, meaning the workplace pension did not necessarily have a cost advantage. Advisers also felt that the post-retirement offerings for those who transferred their funds into a workplace pension were often relatively basic, especially for those with larger transfer values.
Commenting on the research, Alistair McQueen, Head of Savings and Retirement at Aviva, said:
“Individually sought advice continues to be the backbone of the DB transfer advice market, but it is a market under strain. The supply of quality ‘high street’ DB advice is in retreat, leaving many individuals isolated. The industry and its regulators must work together to ensure that those seeking DB advice are not left stranded and exposed. Nature abhors a vacuum, and this advice vacuum is dangerous.”
Also commenting, report co-author Steve Webb, partner at LCP said:
“It is becoming increasingly difficult for members to source affordable transfer advice and this means that schemes and regulators need to do more. Growing numbers of pension schemes are now teaming up with one or more carefully selected advice firm to offer free or subsidised advice on pension transfers and wider pension issues. Given the challenges which members are facing, the pressure on trustees to do more to support members will only grow”.