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Nic Cicutti: Spectre of DB transfer scandal looms larger than ever before

New FCA findings suggest advisers should prepare for significantly higher FSCS contributions at least

Like many adults in the latter half of their lives, my pecuniary affairs are complicated. Not only do I earn a living from multiple employers but my future retirement income is dependent on several sources of funding, which includes three separate defined benefit schemes.

The three schemes all have different retirement dates and accrual rates, not to mention varying levels of life insurance. I keep wondering what I should do about them; whether the cash equivalent transfer value would make it worthwhile to switch to a defined contribution scheme instead.

I ought to ask an expert – except that, it would seem, you cannot trust financial advisers to give you unbiased, or at least knowledgeable, advice on whether it is.

Do not take my word for it, just ask the FCA. Last week, it published a report following an investigation into the subject.

The snappily-named Key Findings on our Recent Work on Pension Transfer Advice is the Ronseal of regulatory reports: it does exactly what it says on the tin.

After collecting data on 45 firms centrally involved in the transfer market, the FCA conducted further assessment work on 18 of them. In a little over three years, these 18 firms have provided advice to more than 48,000 clients about their DB schemes. At the end of it, almost 25,000 people switched out of their schemes.

Yet less than 50 per cent of that advice was suitable. The report found that, among the many issues with the advice provided, firms were not doing enough to understand why a client actually wanted to transfer.

If clients said they wanted “to take control of their pension”, firms did not explore the reasons for this, which in turn meant they did not fully assess “whether the client is able or willing to take the risk required to achieve their objectives”.

Firms simply relied on generic objectives like “flexibility” or “increase pension” during fact finds, rather than drilling down to find out what these terms meant to the client.

Advisers were not properly assessing clients’ risk appetites in terms of trying to meet certain objectives or trying to determine whether some objectives were more important than others.

Some fact finds did not try to work out whether providing death benefits for spouses and dependents could be addressed within the existing schemes, or by taking out separate life cover.

Some advisers did not take longevity into account, or the conflicting demands between a desire to access the potential 25 per cent tax-free cash lump sum and that of wanting to have a large pension pot at retirement.

These were just some of the problems the FCA found. Assuming that 50 per cent figure in respect of problematic advice cited was repeated in terms of the actual transfers that took place, more than 12,500 of the clients whose pensions were eventually transferred were affected. That is a huge amount.

Now, there will be some advisers who argue that we are only talking about 18 firms in total from many thousands of advisers who give good advice. Most of them will either have nothing to do with DB transfers or will aim to provide a far more nuanced and skilful assessment of the costs and advantages of switching, which includes detailed knowledge of the scheme the client wants to leave. All very true. Except that the high numbers of transfers conducted by this relatively small number of firms strongly suggest they are presenting themselves as “experts” in the field and that, therefore, gullible clients are making a beeline for them.

The harm such a relatively miniscule proportion of firms in the advice market is doing, both reputationally and in financial terms, is massive. And there is another problem. The FCA might be able to deal with this small number of firms, either by closing them down or requiring them to surrender their pension transfer advice permissions.

But my concern is over the far larger number of advice firms who are not operating on such an industrial scale but have nevertheless provided advice to one or two, maybe three or four, clients. They thought they were doing the right thing by those clients.

Unfortunately, it is possible things have not turned out that way.

In a fantastic column on his website, former FCA technical specialist Rory Percival points out that, while some people who have commented on the issue might feel they are “very diligent with clients, undertake a full analysis and give suitable advice”, he does not buy this argument.

In fact, based on some of the comments he has read in response to the FCA research, he feels that they too may have been giving unsuitable advice to clients.

If Percival is right – and I suspect that he is – the DB pension transfer market is likely to be the next financial scandal.

At the very least, advisers will be paying through the nose in future Financial Services Compensation Scheme contributions.

As for me, I think I will stick with my occupational schemes for now.

Nic Cicutti can be contacted at


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. It is a funny fact, that if I reviewed any advisers files, one of Roy Percival’s files, I could pull it apart. It is easy to find fault especially when there are no rules, just week guidance, much given after the fact (three years after pension freedoms).

    Having read many articles and seen the data, having experienced dealing with the FCA, I would suggest the true cases of truly bad advice are much lower. The grey area being the unclear files the FCA report, which are frequently taken to mean bad advice.

    If the advice from all advisers is truly this bad we should all be shut down, why have we not been shut down?

    Like the Wild West everyone has become Judge and Executioners on here say and roomers, running with the mob. The problem with this to many innocent persons were hanged.

    • I agree with you Martin and moving on from that, I will repeat what Nic said and respond to the same level of his investigative journalism (i.e. no facts just suspicions)
      “If Percival is right – and I suspect that he is – the DB pension transfer market is likely to be the next financial scandal.”
      I don’t suspect Rory is a “*wat” as I have met him and I agree with a large part of what he writes. He is however often quoted out of context and as we all do misreads from time to time what has been written (I upset him the other day by referring to the FCA as an organsation as morally corrupt and in turn he accused me of making “false claims”, but as yet has failed to point out which of my accusations he can evidence as being false or challenged me to prove they are true or a truly held personal opinion. I am awaiting a response from the PFS to tell me if I need to be disciplined for my comments or if Rory does for accusing me effectively of lying i.e. false claims)
      I do however suspect you are a @wat Nic, based on some of the things you write which are “false claims” and suspicions which get click bait rather than the facts as explained on the FCAs webpage from where the actual report can be accessed and which then outlines the fact it was a targeted intervention and not a sample, so the number of unclears or bad advice was always likely to be higher than what is typical across the industry and what we would like to see from those with PTS permissions (I don’t do PTS work)

  2. The problem with DB Pension Transfers is that the people seeking advice regarding a transfer have already decided what the best outcome for them is . People with a large pension pot want to make use of it in their financial planning and see the pension freedoms as a way of doing it. If the adviser goes along with what they wish to do they are quite happy to pay a contingent fee for an adviser to rubber stamp what they want to do.

    If the adviser were to say to them I will charge you a fee to carry out an objective review of your options and whether or not I recommend a transfer you have to pay me. A lot of consumers would lose interest and say to themselves “Why on earth am I going to pay you a fee for you to tell me to leave my pension where it is already?”

    It makes perfect sense to the consumer and plays into the hands of those advisers who charge on a contingent basis. As it is not difficult to convince many consumers that it is in their best interests to transfer their defined pension benefits.

    However, when it all goes wrong the consumer will claim that they didn’t know what they were doing and that the adviser has pulled the wool over their eyes in order to earn money out of them.

    Who ever said that history doesn’t repeat itself?

  3. Hi Nic,

    Why not do a little leg work and comparison for yourself. You freely admit you’ve got 3 DB schemes yourself and that you don’t know whether you ought to keep them or not, so why not do some diligent journalism and do something such as the following:
    1.) Select some firms to get advice around DB pensions from.
    2.) Get an expert such as Rory, Expert Pensions, or the FCA themselves to go over the advice and assess it.
    3.) Then publish the results critiquing the advice received and assuming at least one was deemed good and correct, put your money where your mouth is and accept that advice.

    This achieves you three things, firstly it’s some great journalism, based on fact and experience, rather than secondhand thoughts and circumstantial evidence.

    Secondly, you can then provide expert advice and critique about what was good and bad about the different advice you received, which may help to improve standards for those that fall short.

    Thirdly, you end up with good advice, get yourself in the best position for your personal circumstances, whilst also gaining a greater understanding of a subject which you’ve effectively admitted you know little about.

  4. I, along with numerous commentators on here, have been saying this would happen since the Government announced the freedoms.

    Nice to know you’ve finally caught up Nic.

    Perhaps a bit more interesting than this tiresome and obvious click bait article, what’s your take on who’s to blame and what role the regulator should be playing right now? Is it a case of wait until there are far more disadvantaged clients and then blame advisers? Or act positively and decisively now and prevent further harm?

    What’s the old saying? Those who can do, those who can’t teach, and those who can do neither… preach.

    Happy Christmas.

    • The only consideration regarding transfers of DB Pensions that George Osborne’s misbegotten and ill-considered Pension Freedom legislation changed was being able to withdraw more than 25% of the value of a pension fund in the form of a lump sum. What he conveniently omitted to mention was that withdrawals in excess of 25% are assessable for tax as earned income. As a result, a lot of people who rushed to cash out (without taking advice) found themselves hit with a nasty tax deduction, only some of which might be recoverable. Anecdotally, many people never even got round to trying to do so.

      OPS members have been able to transfer the value of their benefits to a S32 Buy Out plan since the mid-eighties and to SIPPs since 1990 (the first one was offered by the James Hay Partnership). So the facility to bequeath much greater benefits on death already existed.

      The requirement to buy an annuity (notably upon reaching the age of 75) had already been removed as of April 2011, so GO’s statement in 2015 that no one would ever again have to do so was patently disingenuous. That too was a freedom that already existed.

      Yet, to many people, these appeared to be novelties. Unscrupulous advisers over-played their advantages as incentives to transfer the value of their guaranteed DB pensions into the uncertain medium of a SIPP which, as we know, contains no guarantees at all and the glaring risk of adverse investment performance, both pre- and (for those who are persuaded to opt for Income DrawDown in preference to an annuity) post-retirement.

      It might well be argued that GO’s Pension Freedoms were almost a government-approved charter for bad advice on OPS transfers.

      For its part (why is this so familiar?), the FCA failed totally to anticipate these dangers and to formulate robust advice processes to “secure an appropriate degree of protection for consumers” and to “protect and enhance the integrity of the UK financial system”. Patently, it has achieved neither.

  5. Again, I see the core of this problem being the conflict of interest posed by contingent charging, which skews the whole pitch of the advice proposition.

    That proposition shouldn’t be Should you or should you not transfer but, rather, Which is likely to be your best option and, by the way, the fee (payable in advance) is the same regardless of the conclusions of my analysis.

    Should that not be acceptable, the client is free to walk away. I really don’t understand why the FCA hasn’t decreed that this is the way the provision of advice in this area must be approached.

  6. Following on from my previous comment. Consumers don’t realise the amount of time, effort and knowledge that it takes for an adviser to look at a defined benefit pension transfer objectively and come up with the best solution for them.

    If the best solution is to leave the benefits where they are. The consumer will be left with the feeling that they have paid the adviser money for something that is of no value to them.

    However, what they are not taking into account is the fact that the adviser has stopped them from making a mistake that could have cost them far more money than the fee they have been charged.

    I guess everyone looks at things from their own perspective. Consumers tend to think “What is the benefit to me?” and they don’t really think about the full implications of what they are proposing to do or the amount of work the adviser must put in to come up with the correct recommendation.

    To them a recommendation not to transfer leaves them in a worse position than they were already in. Because they are still in the same pension scheme that they have retained benefits in but have actually paid money, to find out that they should stay where they are.

    Contingent charging looks attractive to the consumer because they only have to pay if they decide to transfer and the payment can come out of the transfer value. As such they don’t feel as though they are physically having to part with money, although they are still paying.

    However, an adviser operating on a contingent charging basis still has to make a living and doesn’t want to spend a large proportion of their time looking at cases where they don’t get paid. As such their could be a conflict of interest because the adviser is looking to transact as many transfers as possible. As that is the only way they will make money.

  7. That should be there and not their. I really should re-read what I have written before pressing post comment.

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