A major new joint research paper by mutual insurer Royal London and consultants LCP has identified major problems in the supply of advice for members of Defined Benefit pension schemes who are considering transferring out.
The issue of DB transfers has become increasingly controversial as regulators have warned that too many people have in the past received ‘unsuitable’ advice. But the paper finds that the supply of high-quality, impartial advice could be increasingly under threat from a mixture of regulatory and market developments. The paper calls for more to be done both by pension schemes and by regulators to ensure that members can access the advice they need.
The paper presents the results of a new survey of more than 500 people who have advised on DB transfers in the past three years. The responses show widespread concern about the constantly changing regulatory environment and the challenges of obtaining affordable Professional Indemnity (PI) cover. Key findings include:
- Nearly half are unsure whether they will still be active in giving DB transfer advice in a year’s time;
- Of those who had already given up advising on DB transfers, three quarters cited PI costs as a key issue;
- Some advisers charging on a contingent basis were considering leaving the market when the FCA’s ban on this charging structure comes into force;
- Advisers felt that FCA’s position on DB transfers was uncertain and some were fearful that a wholesale review of past cases was on the cards; many respondents said that giving DB transfer advice was now outside the ‘risk appetite’ of their firm;
One response to the challenges in sourcing affordable high quality advice has been for schemes to appoint one or more advice firms to offer advice to members. In this model, the scheme will often pay a significant sum to an advice firm to set-up a process for advising members and will subsidise the advice costs to members. The paper gives case studies of two pension schemes that have gone down this route.
The paper calls for greater support for the advice market, including action to reform the system of PI insurance. It is also encourages more schemes to offer ‘partial’ DB transfers as an alternative to the ‘all-or-nothing’ transfer option which many members currently face.
Commenting, Justin Corliss, senior pensions development and technical manager at Royal London, said:
“Deciding whether or not to transfer out of a DB pension is a huge decision, and members should be able to access affordable, impartial advice. Unfortunately, the costs of obtaining PI cover and constant regulatory change have led many advisers to leave the market or to consider doing so. Urgent action is needed to make sure that all members can access the expert advice that they need”.
Steve Webb, partner at LCP, said:
“Pension schemes have an important role to play in ensuring that members are fully informed about their options and can access high quality advice. Growing numbers of schemes have chosen to appoint one or more advice firms to support members as well as subsidising the costs of advice. Members benefit from the reassurance that the scheme has undertaken due diligence on the advice firms involved as well as from reduced advice costs where the scheme is making a contribution”.
Notes to Editors
The full report: ‘Helping members access DB transfer advice – time for schemes and regulators to do more?’ is available from Royal London here or LCP.
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About Royal London:
Royal London is the largest mutual life insurance, pensions and investment company in the UK, with assets under management of £139 billion, 8.6 million policies in force and 4,348 employees. Figures quoted are as at 30 June 2020.