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Why is Defined Benefit pension transfer advice so expensive?

It is a legal requirement for a member of a Defined Benefit (DB) pension scheme, with a Cash Equivalent Transfer Value (CETV) of over £30,000 to obtain advice from a qualified adviser authorised by the Financial Conduct Authority (FCA) to advise on pension transfers. It is not uncommon for members to find it difficult to access this specialist advice for numerous reasons.

  1. The FCA do not like DB transfers and specifically state that they expect advisers operating in this area to start from the position that a pension transfer is unlikely to be suitable for their client.1 The FCA’s research published in December 2018 stated their findings that in their opinion, less than 50% of pension transfer advice given was suitable
    Effect – Advisers are nervous about operating in an area under such intense scrutiny from their regulator that they’ve made it clear they are unhappy with. Does any professional really want to irritate their regulator unnecessarily?
  2. Claims Management Companies (CMC) make life difficult. There are a large number of CMC’s (now regulated by the FCA) that have been looking for new lines of business to pursue as replacement for PPI claims and IFAs might be seen as easy targets. In light of the FCA’s findings noted above, IFAs clients are being directly targeted by CMCs ambulance chasing potentially very lucrative cases to the detriment of the IFA firm. Dealing with complaints is a time consuming, costly and, not to mention, stressful process which will undoubtedly end up being adjudicated by the Financial Ombudsman Service (FOS) because the IFA firm’s Professional Indemnity (PI) insurer will not want to admit liability and settle the case.
    Effect – Advisers still operating in the sector are becoming very particular about the types of case they will take on in terms of size of transfer, age of client and intended investment strategy amongst other things.
  3. PI Insurers are putting their premiums up exponentially. In response to the FCA’s position and the inherent risk of operating in the pension transfer sector, advisory firms are seeing their renewal quotations for PI insurance (which is mandatory for FCA regulated firms) come in at multiples of previous years, with increased excesses and additional restrictive provisions, in response to the market conditions and the increased likelihood of there being a claim and subsequent pay-out. With DB transfers often being for substantial amounts and the maximum compensation on FOS claims being increased to £350,000, PI insurer are understandably factoring that risk into the premiums quoted. Furthermore, due to the long-term risk posed by each individual pension transfer advised upon, each case will increase the PI premium paid by the firm for at least the next 6 years.
    Effect – IFA firms are revaluating the viability of operating in the pension transfer sector in light of the increased cost burden. Many firms are now choosing not to advise on pension transfers.
  4. Costs of operating are high. DB transfers are a lot of work in addition to the risks involved, take a long time and require a lot of administrative input.
    Effect – Advisers have to set their prices for giving advice at a level that makes the work commercially viable as a minimum if not attractive enough for them to be interested. Clients are often not keen to pay the prices dictated by the market and often see the fees as merely a tax imposed on a transaction they wish to undertake.
  5. DB Transfer specialists are busy. Due to the number of firms operating in the DB transfer sector shrinking, demand is naturally increasing. This also compounds the effect of more risk being concentrated in fewer firms and therefore increasing exposure for PI insurers.
    Effect – The price of giving and protecting DB transfer advice is increasing while simultaneously encouraging the advisory market to become more selective about the clients it will work with.

There are other factors that might affect the ability of DB scheme members to obtain pension transfer advice but those are the main ones we have identified. The people we come across most affected by this advice squeeze are:

  • The relatively young – IFA firms often won’t even entertain advising on a transfer before the age of 50, even age 55.
  • Modest CETV – It is hard to find an IFA that will give advice on a case less than £100,000 and many not considering those below £200,000.
  • The cost conscious – most IFAs charge a percentage fee scale to reflect the increased risk the larger the case is. 3% of CETV is a common starting point (although 5% is not unheard of) which often raises eyebrows to those unfamiliar with the process especially those who see the advice fee as merely a tax on exercising their wishes.
  • The adventurous – IFA firms are often nervous about advising clients going into non-FCA regulated pensions and/or investments. If it is the intention of the client to transfer to a Small Self-Administered Scheme (SSAS) and then to invest in property, both of those are non-regulated and may not be something an advisory firm will want to be associated with.
  • Transactional clients – many IFAs are only looking to work with clients over the long term and are therefore unwilling to provide DB transfer advice on a one-off basis.

Despite all of the above factors and difficulties in the DB transfer advice market we maintain a dedicated panel of specialist IFAs who are able to deal with these issues for our clients.

To discuss this further please email us on info@indigotrustees.co.uk

1 https://www.fca.org.uk/publications/multi-firm-reviews/defined-benefit-pension-transfers

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