Retirees who are considering transferring out of their defined benefit (DB) pension are facing “major problems” with the supply of financial advice.
Joint research by mutual insurer Royal London and consultancy firm LCP has revealed that many scheme members have received “unsuitable advice” in the past, and, as a result, impartial advice could be “under threat” from a combination of regulatory action and market developments.
The two businesses polled more than 500 planners who have provided DB transfer advice in the last three years and, overall, there is a fairly negative sentiment towards the space.
Farewell DB transfers?
Nearly half of respondents said that they don’t know if they will still be active in the DB space in a year’s time, as it is now outside their “risk appetite”.
Among those that have already abandoned transferred advice, the main reason for exiting the space was skyrocketing professional indemnity (PI) insurance costs.
Additionally, some advisers said they were considering leaving the market once the Financial Conduct Authority’s (FCA) ban on contingent charging comes into force.
Research by Prudential UK showed that nearly 60% of planners would reduce or stop providing transfer advice when the ban becomes effective.
International Adviser reported in June 2020, that more than 700 financial advisers left the DB transfer space, according to data by the FCA.
Change needed
Royal London and LCP created a paper, on the back of their research, calling for greater support for the financial advice market, including reforms to the PI insurance system.
The document also encourages pension schemes to promote partial DB transfers, rather than offering an ‘all-or-nothing’ option to its members, as an alternative to alleviate the burdens faced by the sector.
Justin Corliss, senior pensions development and technical manager at Royal London, said: “Deciding whether or not to transfer out of a DB pension is a huge decision, and members should be able to access affordable, impartial advice.
“Unfortunately, the costs of obtaining PI cover and constant regulatory change have led many advisers to leave the market or to consider doing so. Urgent action is needed to make sure that all members can access the expert advice that they need.”
Important role
Steve Webb, partner at LCP, added: “Pension schemes have an important role to play in ensuring that members are fully informed about their options and can access high quality advice.
“Growing numbers of schemes have chosen to appoint one or more advice firms to support members as well as subsidising the costs of advice.
“Members benefit from the reassurance that the scheme has undertaken due diligence on the advice firms involved as well as from reduced advice costs where the scheme is making a contribution.”
