Defined benefit transfers continue to drive profits at advice firms, but new figures suggest that more complaints could be in the pipeline across the market.
Last week, The Pensions Regulator published data showing that DB schemes reported around 72,700 transfers out between 1 April 2017 and 31 March 2018.
The actual number of transfers could be more like 100,000, however, as some schemes do not report on transfers, and the total value of the transfers will be at least £14.3bn, TPR noted.
Meanwhile, Office for National Statistics figures published in March estimate the total value of transfers from DB schemes was £34.2bn for the 2017 calendar year, up from £12.8bn in 2016.
These numbers raise questions about whether DB advice has become a bubble, and what might happen when it bursts. A perfect storm could be brewing for advisers, as high DB transfer activity continues, but new claims are also in the works over unsuitable advice in cases such as the British Steel Pension Scheme, while lawyers are lining up cases to hold Sipp providers to account for the failure of non-standard investments.
The eventual compensation bill could also be pushed up by changes made by the FCA recently to how DB transfer redress is calculated.
The regulator acknowledges its new methodology “is likely to increase the overall redress bill because it is likely to increase the value of an individual’s DB pension scheme for the purpose of the redress calculation”.
The fight at the FOS
A Freedom of Information Act request by Old Mutual Wealth, seen exclusively by Money Marketing, shows a significant number of complaints over transfers continue to roll in, but also that the adjudicator had put a number of cases on hold before the FCA clarified how redress should be calculated last October.
The request asked for five years’ worth of data both of poor complaints around DB transfer advice, but also around unsuitable Sipp investments which are often connected with risky recommendations.
The figures show the FOS resolved a total of 2,146 occupational pension transfer complaints about advice over the last five years and upheld 38 per cent.
Over the same period, the FOS resolved 3,492 Sipp cases, where the complaint type had been recorded as “advice” and upheld 56 per cent.
In its response the FOS admitted the uphold rates could be underestimates as it could not resolve a number of complaints while it waited for publication of updated FCA redress guidance on DB transfers.
A rise in the number of complaints coming from the increase in transfers is likely
The FOS has sat on 150 occupational pension transfer cases while waiting for the FCA’s guidance, it tells Money Marketing.
The Ombudsman notes some of these cases date back to the early 1990s, but many complaints were received after 6 April 2015 when the pension freedoms were introduced.
The complaints cover both the suitability of the advice, but also more administrative issues, including businesses declining to provide advice, businesses advising consumers not to transfer, charges for the advice given and delays in arranging the transfer resulting in a reduction in the transfer value.
Old Mutual Wealth head of retirement policy Jon Greer says the data and the FCA’s guidance shows the potential for increased redress payments and should concern advisers.
Plutus Wealth Management chartered financial planner Ruban Sanmuganathan says it is good that the majority of complaints for occupational transfers were rejected and believes it is a sign advice has improved.
Yet he also says that a rise in the number of complaints coming from the increase in transfers is likely and a tiny minority of advisers involved in the British Steel debacle could cast a shadow over the profession.
Sanmuganathan says: “Invariably more complaints about DB transfers will happen in the future – this is simply down to the volume of them increasing significantly over the past few years.
“However, most advisers are much more wary of the risks surrounding such advice. They are therefore doing much more due diligence on each case and taking greater strides to fully document all aspects of the advice.
“Sadly, there will always be a small minority who see an opportunity and abuse it, such as in the case of British Steel.”
Initial figures for claims against the insolvent British Steel advice firm Active Wealth obtained from the FSCS by Money Marketing give an early glimpse of how the fallout from the BSPS is developing.
So far there have been 29 claims in total, with 16 relating to a transfer to a personal pension and seven to a Sipp.
Adviser view: Tom Kean, director, Thameside Financial Planning
Talk to anybody of the right vintage and they will quickly tell you that one of the major flaws of the original Pensions Review of 1988 to 1994
was the lack of clarity when using terms such as “pension transfer”.
There are many different types of pensions, so, in turn, there are many different types of transfers. Some are virtually impossible to justify (such as opt outs and non-joiners). Others are perfectly viable transactions.
It is absolutely critical that we do not repeat past mistakes and that we are crystal clear what we mean. What you ultimately invest those benefits into is the next bit of the story, and not to be confused with where they came from.
Any “pension” can be transferred into a Sipp, and it is possible to use
a Sipp for “esoteric” investments, which is perfectly fine for some, but not for most.
Banning unregulated investments might annoy a precious few,
but the rest of us, including the FCA, would breathe a collective sigh of relief.
It is the transfers to Sipps that give Sanmuganathan cause for concern as there are a number of ongoing legal cases involving Sipp providers.
Two months ago the High Court in London heard a case where lorry driver Russell Adams alleged Sipp provider Carey Pensions missold him a Sipp in February 2012, when money ended up in unregulated rental scheme Store First.
Meanwhile, fellow Sipp provider Berkley Burke has a judicial review case against the FOS scheduled for October. Both cases could herald more future claims against providers and advisers if they are found liable for the failure of non-standard investments in Sipps used by those transferring out of DB pensions.
Sanmuganathan says: “With regards to non-standard investments, this is a concern especially for Sipp providers but recent capital adequacy requirement changes to Sipp companies has forced many to stop accepting such investments.
“Some may still have a lot of these investments within them which could leave them exposed, but it’s unlikely to be a problem that gets worse.
“Some Sipp providers are now forcing customers to remove such holdings from their Sipp to remove their exposure. But the onus should always be on the adviser to recommend the correct investment.”
Peaks and troughs
First Actuarial business development director Henry Tapper says he fears advisers that are enjoying the current transfer bonanza might be oblivious to the inevitable market downturn.
There is a risk that large numbers of individuals who transferred out of their DB schemes only to see the value of their investments reduce will take legal action.
He adds: “The issue is the liabilities which are a result of these transfers. It is an open-ended liability and unless someone puts a cap on that liability it will fall on the FSCS. This is the reason why the FCA is worrying how FOS claims will be covered.
“The transfers have flowed quickly to certain players and one has to question if the providers that have not promoted themselves as pension transfer businesses end up subsidising the ones that have.”
Adviser view: John Abraham, director, HC Wealth Management
The real problems are likely to arise when firms actively involved in the DB to defined contribution transfer market come to renew their professional indemnity insurance – look no further than the forced closure of transfer specialists O&M Pension Solutions.
Insurers are in business to make a profit and if they cannot understand the magnitude of the risks they are taking on, they will pull out of the market, increase premiums or impose conditions that make PI policies all but useless.
This perfect storm last happened in 2003 and I fear that storm is about to hit us once again. This time it is not just advisers who are in the firing line. Sipp providers who have allowed all but mainstream investments into pensions are already being targeted by claims firms.
We are already hearing adverts on the radio encouraging people who have a Sipp to make a complaint. In the same way that PPI has become synonymous with bad advice, will Sipps end up with the same reputation?
Tapper also has worries about the transfers made to some Sipp providers which may not have conducted strong checks on the underlying investments.
He says: “Firms that did not operate due diligence on where money is going are vulnerable [to claims]. What amazed me [in the context of BSPS] is some Sipp providers did not have the desire or means to check money coming from Active Wealth.
“Those Sipp providers might be subject to civil litigation because lawyers could argue they did not exercise a duty of care. There should be checks and balances. Why not have a trust or independent governance committee sit behind a Sipp?”
Navigator Financial Planning director David Crozier says that he is certain high-risk Sipp investments are going to drive DB complaints but advisers have a duty to help clients with transfers if they are qualified to do so.
He adds: “[The industry] needs to do transfers properly and cannot just shut the door on them. If that is going to be your attitude as an IFA and firm, just be clear that you are not doing DB transfers any more.”
Expert view: Jonathan Purle
Be wary of cutting corners to avoid FOS problems
The trigger for most DB transfer complaints are actual investment losses, combined with activity by claims companies. It remains to be seen whether people without actual investment losses, but prospective losses based on a redress formula that still values DB according to annuity factors, will complain in large numbers. This is certainly a risk firms will face, especially if the bad press around DB transfers grows.
The main risk for firms though will be the attitude of the FOS. When investors lose money in any numbers, the temptation is to find excuses to pin those losses on IFAs. FCA supervisors are easier to handle because they are subject to the backstop of a tribunal, but FOS are under no such constraint.
You can expect the FOS to seize on any corner cutting, however immaterial it might be in your experience. Even then, where an advice or product area becomes contentious, you are still at risk of complaints getting upheld however good your advice or record-keeping, however great your qualifications or knowledge, and however many compliance consultants check your files.
A Sipp operator who takes non-advised introductions could be legally liable
You can of course still save yourself and the levy-payers grief by avoiding obvious bad practices.
Arguably, a Sipp operator who takes non-advised introductions is legally liable, and that is being tested in the courts currently. But any authorised adviser is playing with fire when they get involved in any such “chain”. Any inducement or non-monetary benefit – such as free leads – can leave you liable.
However legal and seemingly compliant the arrangement, an unregulated introducer will taint your advice, as will recommending a discretionary manager who is in reality funnelling money to high-risk investments.
Jonathan Purle is principal consultant at Purle Consulting