Transfers are on the rise, with official statistics showing that some £10.6bn worth took place in the first quarter of 2018. Yet this boom has also led to concerns amongst employers and trustees.
Three quarters of attendees at our recent Rethink Pensions seminars believe that members are unable to easily source appropriate and cost effective transfer advice when they need it.1
British Steel may have been an extreme case, but clearly illustrates the potential dangers when members are provided with limited support and turn to financial advisers they assume are trustworthy.
DB members aren’t, of course, the only employees needing financial support. Arguably, the needs of DC members are even greater. Not only do they need advice on what to do when they retire. Unlike their DB colleagues, they also need guidance on how to accumulate wealth, whether that’s pensions or other long-term savings such as ISAs or property. And with smaller pensions pots, it’s even more important to make every pound count.
Refreshingly employers do not see financial advice as just another benefit for the privileged DB few. 85% of our Rethinking Pensions attendees said it should be made available to both DB and DC members.2 Amongst enlightened employers, we are already seeing expansion in financial advice provided to employees to DC and other savings – and focusing across an employee’s entire career rather than just their retirement.
The FCA has a difficult balancing act on its hands. It needs to maintain quality but also to make advice available to the wider population.
For those in the pensions industry the word advice has a particular connotation involving a regulated process and a personal recommendation. However, it’s worth remembering that advice is more than this. The Oxford English Dictionary defines advice as ‘guidance or recommendations offered with regard to prudent future action’.
In its recent consultation on transfer advice, the FCA has tightened the regulatory regime, retaining the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable. It is also seeking views on whether there should be a ban on contingent charging (in other words, charging only where the advice is to transfer). These changes are understandable, given the recent supervisory work (in particular, around advice given to British Steel Pension Scheme members) showing 'significant evidence of unsuitable advice being provided'.
The surge in the need for transfer advice has led to a squeeze in IFA capacity and an increase in costs. What’s more, the regulatory and political scrutiny has resulted in the withdrawal of Professional Indemnity insurance from some areas of the market, limiting capacity even further.
In the DB market, we now arguably have a gilt-edged product for the few and no advice for the many. In a DC world, where the average pot size is around £50,000, we can’t allow this to happen.
The relative simplicity of DC advice helps – but in order to deliver widespread support, other options need to be explored. Current contenders are algorithms that can deliver ‘robo advice’ and more general member guidance, which offers more than just a list of options but stops short of a personal recommendation. Only when we embrace these alternative forms of support to individuals can advice really become the norm.
Please contact James Riley for further information.
1,2 Recent KPMG survey carried out with attendees of KPMG's Rethink Pensions breakfast seminars.