Advising on Defined Benefit Pensions

I wrote an article a few weeks ago on the importance of Continued Professional Development (CPD) for advisory firms.  For myself part of my own CPD has included the ever-shifting demands of advising on defined benefit pensions and the snappily titled ‘FG21/3 Advising on pension transfers’ published by the Financial Conduct Authority in March 2021.

The area of advising on defined benefit pensions continues to be an area of concern for the regulator as they continue to deal with the fallout of individuals being incorrectly advised (I use the word advice very loosely here) to transfer out of the British Steel Pension Scheme.

The subsequent ability of gaining meaningful redress has been severely limited by the fact that the original advisory firms no longer exist with transfers often being made into unregulated investments where the only motivation for the adviser was the level of commissions payable.

The latest guidance from the FCA further tightens the advisory requirements place on Firms and individuals with the FCA again making it clear that for the regulators standpoint the starting point is always that a transfer out of a defined benefit pension scheme is unsuitable for the member.

One of the biggest changes is the ban on contingent charging on defined benefit transfers in all but a few pension transfer scenarios.  Contingent charging has been banned in most circumstances, with only consumers with certain identifiable circumstances, such as those suffering from serious ill-health or experiencing serious financial hardship, being exempt.

Contingent charging meant that a client only paid for the advice if they went ahead with a transfer with the FCA understandably concerned that this business model inevitably created a conflict of interest between a member getting the right advice and the adviser getting paid.

This in itself hasn’t caused Henwood Court to change their procedures as we never charged fees on this basis anyway and have always had a clearly identifiable, separate research fee.

The other related change to this is that an adviser now needs to charge the same fee regardless of the outcome of its advice to a member on their defined benefit pensions.  This once again is designed to avoid any potential conflict of interests and making it transparent that the advisory fee being paid is for the advice to an individual on their membership of a defined benefit scheme and the options available to them.  If the right advice is that the individual should remain a member of the scheme the adviser should still be paid for the work associated with arriving at this conclusion.

The initial results of the changes introduced last year is that there has been a significant fall in the level of activity in this market and an increase in the costs associated with advising in this area.

So, if we know that advising on defined benefit pensions potentially puts us at odds with the FCA, increases our professional indemnity costs and places a greater regulatory burden on both the Firm and individual advisers why do we continue to hold our permissions for advising in this area?

In an article for the Birmingham Chambers of Commerce last year I identified the increasing number of firms giving up their permissions to advise in this area, either unwilling or unable to obtain the necessary professional indemnity insurance.  This trend has continued with the cost of professional indemnity insurance continuing to rise.

For us it has never been a case of taking a purely commercial view as to whether we could earn more advisory fees form advising on defined benefit pensions than the increase in professional indemnity costs.  If we had we would have perhaps given up our permissions a few years ago.  For instance, in the last two years, we have only advised two clients to transfer their defined benefit pensions.

Those firms still able to advise on defined benefit pensions will continue to fall with it now being very hard to find an independent firm like ours still operating in this space.  As well as priding ourselves on the way we undertake this type of business for us the reason for retaining our permissions is more about retaining the ability to at least have this conversation with clients.

We agree with the FCAs stance that the right advice for the majority individuals is that they should continue to remain deferred members of their defined benefit schemes.  However, for that one individual where it isn’t shouldn’t you as the adviser being having that conversation?  This for us is the value in retaining our permissions and paying the cost of doing this.  I never want to be in a position where I know what the right advice is to a client but can’t give it!

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