The defined benefit (DB) pension transfer advice market is shrinking but research shows how quickly the number of firms offering the service has decreased in short space of time.
The sector was rocked by the British Steel Pension Scheme scandal in 2018, and since then, advisers have been hit by rising professional indemnity (PI) insurance costs and levies, with some seeing 400% increase in PI premiums.
Aegon and NextWealth surveyed 227 financial advisers in the UK and found 41% are still offering DB advice, either directly or in partnership with pension transfer specialists.
This was 56% of advisers in the 2018 report.
The report also found that smaller firms, those with less than £50m ($61.1m, €56.4m) under advice, are least likely to offer transfers with only 28% doing so.
This rises to 50% of firms with assets under advice of between £50m and £249m, and 57% for firms with assets above £250m.
Movements
The DB market has a lot of firms coming and going due to the cost of being in the market.
Some 17% of advisers said they used to provide DB transfers but have stopped doing so, while 15% of firms have significantly curtailed the volume of business they write or intend to do so over the next 12 months.
Only 3% will exit completely over the same time period, while 2% said they are not currently offering DB transfer advice but intend to do so over the next 12 months.
In March 2020, former Financial Conduct Authority (FCA) chief Andrew Bailey told a Treasury select committee that around 370 firms with DB pension transfer permissions have left the market over the last two years.
Reasons for exit
Of those advisers who stopped providing or reduced the volume of DB advice they give, the main reason was the overall business risk to provide it (36%).
This was followed by 18% saying increases in PI insurance premiums and 14% who said PI insurance excess.
The Personal Finance Society (PFS) has been campaigning to improve the PI insurance market for advisers.
It said large PI costs are causing firms to turn away clients who need government-mandated advice on DB pension transfers, as some insurers are only willing to cover part of the maximum award if a claim is made.
Additionally, advisers are being subject to massive scrutiny and time delays to just get PI coverage quotes.
The Financial Conduct Authority (FCA) has recently laid down the law over coverage, saying firms need to have PI insurance to carry out transfers.
Fees
The survey also asked the 98 advisers who currently offer DB transfers or plan to in next 12 months how they will structure their advice charges.
The practice of charging an additional implementation fee for those that transfer is the most popular approach (44%).
Some 24% said charging the same overall fee regardless of income.
The research suggests that 75% of firms will be affected by the change of the FCA’s rules to ban contingent charging.
