I am conscious I have been a pessimistic voice on the topic of defined benefit transfers, but I find the recent drop in the number of them as puzzling and concerning as the rise that came before it. There are many who say it is natural for the demand to reduce because those who should transfer have done so already. But I do not follow this argument. Nothing stopped people transferring before April 2015, yet most did not.
Accessibility and flexibility existed if an individual had £12,000 of guaranteed level income (if they did not meet this benchmark, a transfer would almost never be appropriate).
The only thing that changed at that point was death benefits, but it is widely understood life insurance can meet a need for lump sum death benefits, so I cannot see a transfer being appropriate for this reason.
Furthermore, pension rules have changed so many times, we should be confident they will be different when most people pass on. Nevertheless, it appears it is not just advisers who are nervous, with several firms stopping receipt of DB transfers, or at least refusing insistent clients.
I understand the wish to stop receiving these transfers (although with some saying they account for one third of their inflows, it must be painful), but it is the inconsistency in the way some providers deal with them that I find most worrying. Selectively deciding which transfers to process and which to avoid seems a lot like advice to me. The Pension Transfer Gold Standard is a worthy framework introduced by the Personal Finance Society but it would have been useful earlier. I support the aims of its Pensions Advice Taskforce but not all its proposals. Why, for example, is it desirable for “advisers to ensure the widest possible access to financial advice”, or to have a conflicts-of-interest policy unique to DB transfer advice?
I said some time ago that it was clear most people should not transfer and an early filtering factor would be for a client to elucidate why they were not “most people”. Now, most people have realised most people should never have transferred.
Apart from a few high-profile cases like British Steel, FCA involvement has been fairly low-key.
Contrary to popular perception, though, I do not believe British Steel was unique. While there were high-profile examples of extremely poor practice, it is the quality of the average advice that is a worry.
The FCA published its findings on what did not meet its current expected standards, but these standards could rise – and retrospectively.
I am not saying this is right but it is a risk, and therefore poses a significant concern that soon its view of finding transfers acceptable on a “no harm done” basis will change.
To me, it seems reasonable, given its high-risk and irrevocable nature, that someone transferring should find themselves demonstrably better off. This is, and should be, a significantly higher benchmark than for pension or Isa switches.
With awards increasing at the Financial Ombudsman Service, it seems obvious smaller firms are being pushed out of ongoing advice in this area. This should be of concern for two reasons: firstly, industrialisation of DB advice can lead to bad outcomes and, secondly, payment protection insurance-style compensation on DB transfers might be astronomical.
Alistair Cunningham is director of Wingate Financial Planning