Complaints about DB transfers are currently low but claims management firms and a stockmarket downturn could create choppy conditions for advisers.
The national press has come to a pretty unanimous conclusion that defined benefit to defined contribution pension transfers will be the next mis-selling scandal.
Although the Financial Ombudsman reports low levels of complaints about transfers, how likely is it that there will be a wave of complaints and how successful are they likely to be?
A strong stock market and the fact that many people have only just transferred is likely to mean that complaint volumes will be low.
But it is not hard to see a perfect storm brewing which could change all that.
The first issue is that payment protection insurance claims farmers will have time on their hands when the PPI deadline runs out in August 2019. The average PPI claim was for less than £3,000, whereas the compensation available for a badly advised DB transfer could easily run into six figures. It is hard to imagine that the claims management industry won’t start to get a lot more interested in pensions.
The second problem will be a stock market downturn. Although a well-advised client will have understood that the value of their DC pot could go down as well as up, and should not have been advised to transfer if they cannot cope with some fluctuation in the value of their pot, this won’t stop a search for scapegoats if pots go down for a period.
The way in which compensation is calculated is a real issue.
If it is decided that someone was wrongly advised to transfer, FCA rules say that the compensation should try to put them back in the position they would have been if they had not transferred in the first place.
So in effect, this means replacing the value of the guaranteed DB benefits foregone, which can be a very expensive thing to do in a DC world.
The FCA says that the calculation should be based on the assumption that any compensation paid now would earn only half the expected rate of return on equities up to pension age.
This could generate some juicy compensation figures.
PI insurers are already starting to take fright (and flight) because of fears of a tidal wave of complaints, despite the fact that most advisers do a good job.
For example, I am hearing of advisers being told that any advice they have given on British Steel cases will either not be covered at all or will attract a separate premium or excess.
Another risk is of some firms phoenixing to try to walk away from the consequences of past advice. If this is to avoid being a feeding frenzy, the Financial Ombudsman will have a key role to play.
Advisers remain concerned that the FOS may be applying different standards to the FCA when it comes to assessing transfer complaints.
If this is not the case, then both the FOS and the FCA need to issue a joint statement which confirms their common standards for transfer advice.
If the FOS ends up applying its own approach then advisers will not know where they stand and it will be the claims management companies who will be popping the champagne corks.
Steve Webb is director of policy at Royal London