A year on, and I’m still worried about DB transfers
It’s a year since I first wrote about Final Salary and Defined Benefit transfers.
Plenty of water has flowed under the bridge since then. However, there’s still no doubt in my mind that the issue remains the single largest threat to our profession, as well as the finances of many thousands of people.
Over the past few months the events surrounding the British Steel pension are a microcosm of the wider issues.
We’ve seen a perfect storm of (understandably) worried consumers, a relatively short deadline to make decisions, and unregulated introducers, along with unscrupulous advisers, taking advantage of the situation.
Recent work by the FCA shows the potential damage left behind.
The regulator has reviewed 129 cases from 21 advisers and found 49% were either unsuitable or suitability could not be confirmed. Extrapolate those results to the circa 2,000 British Steel transfers and that’s a huge potential liability which could fall on the FSCS (and consequently advisers), if those responsible can’t cope with the financial implications of their poor advice.
News that the FSCS has increased their levy for life and pension advisers to £87 million, £12 million over the cap, shows that British Steel isn’t an isolated problem. The increase is a result of continued SIPP mis-selling, which I would wager is at least partly linked to greater Final Salary and Defined Benefit transfer activity.
Assuming those offering poor advice don’t experience an unprecedented Damascene conversion, significant changes are needed to effectively address this issue.
This must be driven from Canary Wharf.
There’s no doubt that recently the FCA has stepped things up a gear in relation to British Steel. I just hope it’s not too little, too late. Frank Field, Chairman of the Work & Pensions select committee was scathing about their response to the situation and I have huge sympathy with Field when he said: “They must take care they are not sleepwalking into yet another huge mis-selling scandal.”
However, more must be done. There are three things I’d like to see change sooner rather than later.
Firstly, I’m in favour of a mandatory double-check on all recommendations to transfer.
Currently, there is no requirement on a directly authorised firm to take external compliance input or have their advice reviewed. This means some will face significantly less scrutiny than their appointed representative counterparts.
As an aside this is standard practice at Beaufort and something which is welcomed by our advisers.
The FCA Register
Secondly, we need to make it easier for consumers to find the right adviser.
The British Steel debacle has highlighted serious issues with the FCA Register. Finding an appropriately qualified adviser on there is tough.
Furthermore, it isn’t immediately clear that a firm has had their permissions restricted.
The register is set to change, with individual advisers set to be removed. This is a retrograde step and needs reviewing. It should be an important weapon in fighting scams, while helping to match consumers with the right adviser. Currently though, the user experience is poor and needs improving, not cutting back.
Finally, Pension Freedoms has completely changed how retirees take their pension benefits.
A far greater emphasis is now placed on flexibility, moulding income to provide a certain lifestyle at different stages of retirement.
However, flexibility can only be achieved once the client (and the adviser) are confident that the essential expenditure can be met in the short, medium and long term, allowing for a variety of factors, most notably inflation.
The only way to achieve that is through rigorous cashflow modelling, testing different scenarios to asses the impact on a client’s circumstances.
That’s why we believe cashflow modelling should be mandatory for all Defined Benefit transfers. Without it, how can we be sure clients aren’t leaving themselves significantly exposed during retirement?
Time for change
The situation at British Steel saw the best and worst of our profession. The issues of mis-selling and unregulated introducers were first highlighted by a small group of advisers, journalist and experts.
Without their intervention who knows what might have happened?
However, the evidence shows that British Steel isn’t an isolated example. And, the recent events at Carillion demonstrate just how important it is that we all grasp this nettle now.