Navigating defined benefit transfers – a high risk area for IFAs

Defined benefit transfers are currently in high demand, and the independent financial advice required in respect of those transfers is often complex. This has been demonstrated by the high profile transfer cases arising out of the collapse of British Steel, which has drawn national attention to the transfer advice provided to members of the British Steel Pension Scheme (BSPS). The cases also shine a spotlight on how IFAs will be expected to conduct defined benefit transfer business in the future.

IFAs under scrutiny

In April 2016 it was announced that Tata Steel UK (the sponsoring employer of BSPS) was to sell its UK operations. The £700 million funding deficit in BSPS threatened to derail the sale and thereby force the closure of the company. Following detailed discussions with the Pensions Regulator, a restructure of BSPS was initiated and the scheme’s 130,000 members were given three options: 

1. Remain in the BSPS, which would be transferred to the Pension Protection Fund (PPF). 
2. Transfer to a new defined benefit scheme, BSPS 2. 
3. Transfer out altogether to a private pension. This was only an option for the 40,000 non-pensioner members more than a year away from retirement age.

In the case of the former two options a defined benefit pension would be retained, but benefits would be at a lower level than those specified under the trust deed and rules of BSPS.

Clearly this was not a decision that steelworkers (or anyone) should be taking alone – and if the third option was selected and the pension value was more than £30,000, regulatory rules required advice from a regulated and authorised adviser.

The need for advice was quickly identified by advisers – both regulated and unregulated. There were reports of workers being solicited by financial advisers on the steelwork’s gates and of “chicken and chip” meetings, at which advisers tried to persuade steelworkers to engage their services. Such tactics have garnered unfavourable publicity which has led to a significant level of scrutiny of advisers by the Financial Conduct Authority.

The role of the FCA

A recent FCA review of the advice given to steelworkers found that a third of those who had transferred out of the BSPS since its restructuring had received unsuitable advice, and in a further 16 per cent of cases it was unclear whether the advice was suitable or not. While the review considered only a relatively small sample, the results are alarming.

The FCA has since:

• Contacted 109 firms conducting BSPS transfers. 
• Restricted eight IFAs’ pension transfer activities where there were concerns about the suitability of the advice provided. 
• Asked 66 firms for information about their work.

Lessons to be learned and challenges ahead

There have already been suggestions that some BSPS members have transferred away from a defined benefit scheme to invest in esoteric and unsuitable investments, or have signed up to schemes charging excessive fees. If that proves to be correct or if the advice being given to up to half of the members is in fact unsuitable, it may not be long before the advisers in question are having to notify their insurers of claims.

Advisers (and their insurers) need to be alert to the risks posed by this area of business. By way of example: 

• Advisers undertaking pension transfer business need to keep up to date with current legislative and FCA requirements/guidance. 
• Advisers should undertake their own risk analysis to ensure that their procedures will adapt to the evolving proposals on pension transfers, and to avoid a future mis-selling scandal. 
• The FCA’s focus is on protecting individuals so advice should factor in all the nuances associated with the reasons why a defined benefit transfer may be in an individual’s interest. There will be a host of reasons why for some individuals a defined benefit transfer may be the right choice – tax, divorce, health and family considerations all play a part. Advisers will need to tailor their advice to reflect the broader retirement landscape and ensure it is fit for purpose. 
• Any advice should be coherently expressed in plain English, including in writing, and contain a clear warning of the risks of transferring a defined benefit pension. Advisers may want to consider recording any advice given orally, as otherwise it can be very difficult to establish what advice was actually given.

More generally, the introduction of pension freedoms in April 2015 has encouraged many people to view their pension arrangements differently. Attitudes have irreversibly changed and people no longer necessarily consider it essential to buy a guaranteed income. Consequently the volume of defined benefit transfers has risen dramatically: a recent report suggested there are now four times as many transfers as before pension freedoms were introduced. This is a trend which is expected to continue.