Advisers are being urged to consider triage systems and a comprehensive approach to outsourcing to handle the surge in defined benefit transfer enquiries.
There is a mismatch between the number of clients wanting to access DB pension funds and the number of advisers prepared to offer advice, or facilitate such transfers.
Since the pension freedoms were introduced, there has been a sharp increase in the number of people looking to transfer out of DB schemes.
This trend has been exacerbated by the fact that transfer values have risen significantly in many cases due to falling gilt yields.
For many people the lure of a large pot of money can outweigh the longer-term benefits of an index-linked guaranteed income.
But advisers are cautious about advising on DB transfers. To start with it is estimated that only a third of advisers have the necessary qualifications.
Those that are qualified are concerned about breaching FCA guidance, which could potentially leave them open to misselling claims if the client later decides this was not the best course of action.
The FCA rules are clear; advisers should start with the assumption that a DB transfer is unlikely to be in a client’s best interests, and transfers should only be recommended where there is clear evidence it is in the client’s interest.
There are concerns this heavy regulatory workload, and subsequent high fees, are creating particular problems for those with smaller DB pots.
At the initial stage, it is not about identifying which clients should transfer, but who definitely should not
CTC managing director Nigel Chambers says: “It’s not surprising that qualified advisers are concentrating on those who have pensions with transfer values of £250,000 or more. However, the regulations stipulate that anyone with a DB transfer value of £30,000 or more needs to get advice before they can access this money.”
Chambers points out the real advice gap is for those with pension pots worth between £30,000 and £60,000. He says: “At these levels it isn’t really cost-effective to pay an upfront fee running into several thousands of pounds, particularly if the advice is likely to be stick with what you’ve got.”
One solution to this problem may be a pre-advice triage system, which may help manage this demand more efficiently.
Standard Life has championed such an approach. Head of financial planning and proposition Alastair Black says: “Our research with advisers has shown there has been a massive increase in the number of people seeking advice about transferring out of DB pensions.
“However, in the majority of these cases the final recommendation is not to transfer.
“There are a significant minority of cases when a transfer may be the right course of action, and these clients may benefit from exploring these issues in more depth. But a lot of people are going through this time-consuming and costly advice process for no benefit.”
He argues an initial triage system should help weed out these cases from the outset, saving clients money, and helping advisers target their efforts on those most likely to benefit from a transfer.
Black says: “At the initial stage it’s not about identifying which clients should transfer; it’s about identifying those who definitely should not.”
Chambers says to keep costs down, the only realistic option is using some form of online questionnaire or robo-advice as a screen.
Black says this process should focus on a number of key areas, but the most important is whether the client understands what they are giving up by transferring out of a DB scheme.
He says: “Asking blunt questions, such as what don’t you like about guaranteed income, can quickly identify those for whom this is not an appropriate course of action.”
Standard Life says it is working with advisers about introducing questions which would “build on existing advisory processes, not replace them”.
Intelligent Pensions head of pathways Andrew Pennie says: “This pre-vetting process could be successful. We need to look at better ways to educate people about the risks and implications of transferring out of DB schemes.
“Many have simply heard colleagues talk about large transfer values and they assume this is the best course of action. They don’t realise the value of what they are giving up. If this could be clearer from the outset this could help save advisers time and clients money.”
Given this increased demand for DB transfer advice, some advisers are opting to outsource such decisions to specialist firms that have the necessary qualifications.
But even some of these specialist firms are warning advisers this is not a silver bullet when it comes to protecting themselves against future misselling claims.
Investment Quorum director of private clients and pension transfer specialist Petronella West says: “This is a complex area, and it’s about more than having just the requisite qualifications.
“People need the relevant experience when it comes to advising clients.”
West says other clients will refer pension transfer requests to them, but they do not outsource this business on behalf of others. If the company does recommend a transfer, then it will also advise on investment options within a defined contribution environment.
If advisers are outsourcing these decisions purely to avoid liability, this is not going to work that well
West adds: “We make it clear at the outset that the client has to pay a fee in the region of £6,000. This is payable whether or not we recommend a transfer.”
Pennie also takes on pension transfer requests from other firms. But like Investment Quorum he says if it supports a pension transfer, then it will provide ongoing investment advice. He says: “We feel this is best practice. We want to ensure we have an ongoing relationship with this client.”
But this is not always the case. Syndaxi Chartered Financial Planners managing director Robert Reid says he is concerned about the number of advisers who seem to be outsourcing this pension decision, but then continue to advise clients on their investments.
He says: “There is a lot of naivety around such decisions. Many of these advisers weren’t around in 1994 in the last major pension mis-selling scandal. They would be a lot more cautious if they were.
“If advisers are outsourcing these decisions purely to avoid this liability, then I would politely suggest this isn’t going to work that well.”
A fight with the FCA
The FCA has said such decisions should not be made “in isolation” and those advising on pension transfers should take into account any investment advice given by a third party. But it has not specifically ruled out such arrangements.
This outsourcing is particularly problematic if there is some fee-sharing arrangement between the two companies.
Reid says: “There seems to be a real conflict of interest here. If there is a complaint at a later stage, then I would expect the client – or the client’s family – would be able to pursue complaints against both firms.
“If the outsourcing specialist goes under, where are they going to take this complaint? Probably to the firm that continues to manage their pension money, and has benefited financially from the decision to leave the DB scheme.”
Those who do not have the required qualifications cannot help those who come to them wanting to transfer from DB schemes.
But before they outsource this business, or recommend a specialist firm, Reid says it is important they do sufficient due diligence.
He says: “Advisers need to ask themselves how robust the firm’s processes are. But many are not really in a position to assess this properly, lacking the required qualifications themselves.”
The insistent client hold-up
Allied to this outsourcing issue is the question of what advisers should do with insistent clients.
Pennie says: “If our recommendation is not to transfer we will not facilitate this business. We may look again at the advice process – either the client has not understood us, or we may not have understood
“But if we have not recommended this course of action we do not think it is the right thing to do.”
However, other advisers will facilitate this business, provided they have followed the guidance set out by the FCA on insistent clients. This stipulates the advisers must clearly set out his recommendations and the risks the client faces in not following this advice.
Reid says: “Again there is a complacency that this means they won’t be liable for future claims. If the person they are dealing with is an experienced investor, perhaps a financial director, then this may be the case. But if it’s a normal individual I suggest this won’t work. You may have warned them not to stick their hands in an open fire.
“If they say they don’t care about getting burned, and you say, fine, and then shove their hands in the fire, then the regulator may decide you also bear some responsibility for the consequences.”