The final blow to Final Salary transfers?

29th March 2019

It was over two years ago when I first wrote about Final Salary transfers. Plenty of water has flowed under the bridge since then, including the British Steel debacle and the significant mis-selling of SIPPs.

However, the increase in the Financial Ombudsman Service (FOS) compensation limit has delivered a potentially fatal blow to some advice firms. It will also impact consumers at a time when high-quality advice has never been more important.

What’s changing?

The FCA’s Policy Statement PS19/8 states:

“…on 1 April 2019, the ombudsman service’s £150,000 award limit will change to:

• £350,000 for complaints about acts or omissions by firms on or after 1 April 2019
• £160,000 for complaints about acts or omissions by firms before”

The FCA believes that only around 500 high-value complaints will be affected with 75% of these covered by the new limit. The new rules will affect both consumers and advice firms:

Advice firms

During the consultation period insurers suggested that the change would increase PI premiums by 200% to 500%. FCA figures show a 500% increase would push the average premium (for a 2 – 5 adviser firm) from £3,400 to £20,100, cutting profit margins by 80%. If this happens, it is likely that many firms will give up their Pension Transfer permissions.

The FCA believe this is a ‘worst case’ scenario, instead it predicts increases of around 140%, pushing the average premium to £8,000 per year.

There is a possibility that the regulator is being conservative in its estimates of both the average PI premium and the likely increase. However, even if they are correct, a 140% increase will still see margins fall by 23%. That would have a significant impact on most advisory firms.

It isn’t just the cost of PI insurance which this will affect. The terms and conditions are likely to become more restrictive. For example, I saw a financial planner post on social media that his renewal excludes members of the British Steel pension scheme. This is a worrying development for both advice firms and consumers.

Consumers

Transferring away from a Final Salary scheme (assuming the value is above £30,000) is the only area where the law forces consumers to seek financial advice. The market, therefore, needs to function efficiently, with enough advice firms to meet demand and services priced fairly to all.

The FCA doesn’t believe the worst-case scenario will happen. But, it acknowledges that if it did “up to 1,000 ‘higher risk’ PIFs (personal investment firms) could stop providing DB transfer advice under a £350,000 award limit because they would be unable to afford the PII cover.”

This would leave around 1,500 firms with pension transfer permissions. Although the FCA believes this will meet demand, I question whether that would be the case.

It’s also logical that higher PI costs will be passed on to the consumer in the form of higher advice fees. An increase which will be compounded if demand exceeds supply.

Finally, if scheme specific exclusions become widespread, we could see some consumers finding it even harder to find advice.

The possible result?

A large increase to PI premiums, or a tightening of policy terms, poses an existential threat to Final Salary advice. This would undermine Pension Freedoms and could create a two-tier system.

Naturally, if poor advice means compensation is due then it should be paid. I’m also in favour of simplifying the current system, so ‘high-value’ complainants can seek redress via the ombudsman rather than taking costly legal action. In fact, I’d go further, reforming the whole system; in what other profession do those giving good advice have to meet the increasing cost of other’s misdeeds?

However, the law of unintended consequences means the increased limit, which the FCA themselves suggest will only help a few hundred consumers each year, could cause significant harm to the very people the ombudsman seeks to protect.

My concerns are well documented; PI premiums rising, advice firms retreating from the market and consumers left unable to find (or afford) advice.

Time will tell whether this will be the case. In the meantime, stay close to your insurer, communicate with them regularly and ensure they help to design your processes. That’s what we’ve done for years at Beaufort Financial and exactly what we’ll continue to do.