DB transfer market 'source of real concern' despite positive signs

The latest findings from the Financial Conduct Authority (FCA) have shown “some signs of improvement” around defined benefit (DB) transfer advice, although concerns around the supply of advisers remains a concern amongst industry experts.

The FCA data found a “significant fall” in conversion rates, which it highlighted as an indication that firms are starting to act more in line with expectations and messages that for DB advice, in most cases, a transfer is not in the client’s best interests.

Furthermore, it found a “significant reduction” in clients proceeding to transfer against advice as insistent clients.

However, the FCA also found a reduction in the number of firms offering DB advice from around 3,042 in 2018 to 1,521 in January 2021, which it noted may be as a result of not having adequate professional indemnity insurance for this.

AJ Bell senior analyst, Tom Selby, warned that the market was "shrinking dramatically" in the face of tougher regulation and rising professional indemnity costs, stressing that many people who would benefit from advice simply cannot access it.

“And where someone would be better off switching from a DB to a defined contribution (DC) scheme – for example because the death benefits are more favourable – if they cannot speak to an adviser they risk being stranded in a sub-optimal financial position," he said.

Adding to this, Aegon pensions director, Steven Cameron, emphasised that with no sign of a solution to the professional indemnity issue, stating that with the FCA encouraging a ‘use it or lose it’ approach to permissions, there’s "every chance" of further falls.

"It remains vital that there is a sufficient supply of advice to meet ongoing demand," he added.

LCP partner, Steve Webb, also highlighted FCA data which showed that most advisers used to charge for DB transfer advice on a contingent basis, warning that the contingent charging ban, which came into effect from 1 October 2020, will likely lead to more exits from the market.

He said: “It is a welcome trend that historically high rates of recommendations to transfer out of DB pension schemes are now on the decrease. But the DB transfer market remains a source of real concern.

“The supply of advisers has fallen dramatically in recent years, and recent regulatory changes plus the cost of obtaining insurance is likely to reinforce this trend.

“Members are likely to find it increasingly difficult to source high quality impartial advice if left to their own devices.

“This data reinforces the case for pension schemes to appoint one or more high quality advice firms to help members make good choices about pension transfers."

In addition to this, Cameron stated that the clarification that many triage services were crossing into advice will have led to a "sharp reduction" in this approach, warning that it was "unclear" if the new form of abridged advice is proving an effective replacement, or how this will affect future conversion rate reporting.

Concerns have also been raised around the number of people transferring out of a DB pension scheme and into a workplace pension, with the latest data showing that this represented just 1 per cent of transferred funds.

Industry experts have warned that this could create a challenge for advisers looking to benchmark a proposed destination for the transferred funds against a low-cost workplace pension as required under regulation.

"The strengthened requirement to consider available workplace pensions as the receiving scheme unless an alternative is more suitable is also likely to have a significant impact with the data showing only 1 per cent of transfers went into workplace pensions between October 2018 and March 2020," explained Cameron.

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