The Final Salary red herring

19th September 2018

I’m going to return to a favourite topic this month: Final Salary pension transfers.

I’ve regularly written about my concerns over the past couple of years. However, I’m becoming increasingly convinced that a potentially existential threat is going almost unnoticed.

Best practice might not be enough

Naturally, I welcome the increasingly high standards and best practice I see in this area.

At an individual firm level, that might mean 100% pre-approval of transfer advice (as we exercise at Beaufort Financial), an emphasis on improving knowledge and skills through CPD and formal qualifications, as well as external reviews of both processes and files. Best practice events, allowing advisers and planners to learn from their peers, are hugely valuable too.

However, advisers and planners who implement best practice aren’t the ones we need to worry about. Which is why I also welcome the FCA’s focus on this area, targeting those firms seemingly intent on making a fast buck before the Final Salary transfer train heads out of town.

Nevertheless, despite the focus on best practice, we face a threat, which despite gaining more publicity in recent months, the effects of which have yet to be fully felt.

The one thing we all need

Ultimately, the ability for advisers and planners to advise on pension transfers rests on one thing: being able to obtain and maintain adequate and commercially viable PI insurance. That’s why tales of significant premium increases, limitations on individual claims, excesses being pushed to commercially unviable levels and renewal applications being declined are so worrying. It’s clear many PI insurers are concerned about the potential liability they are exposed to, however, some PI insurers, anecdotally at least, seem to be overreacting.

The squeeze on PI terms will no doubt cause some firms to improve processes still further, which must be a good thing; no one should rest on their laurels. However, it may lead others to reflect on the renewal terms offered, the risk they are taking and the commercial viability of pension transfers and conclude that they have no choice but to withdraw from giving this type of advice.

The FCA has reported that £20.8 billion has been transferred out of Defined Benefit schemes in 2017, up from £7.9 billion in 2016. Meanwhile, XPS Pensions Group calculates the average transfer value to be £232,000.

The figures from The Pensions Regulator are different, showing total transfer values in the year to March 2018 reaching £14.3 billion, corresponding to 72,700 transfers.

Either way, that’s a lot of people who are required by law to take independent financial advice. If we see a significant number of firms withdrawing from the market, we’ll see an increase in the advice gap; which undoubtedly already exists and is one of the reasons those less focused on the best possible client outcomes have been able to flourish.

Meeting demand

My question is simple: if the PI insurance squeeze continues causing advisers and planners to withdraw from this market (either voluntarily or because they can’t obtain suitable cover), will there be enough pension transfer specialists willing and able to advise?

There’s a very real possibility that consumers will be left in a regulatory purgatory with advisers willing (although not able) to advise, and consumers needing advice, but a very limited supply of firms who can meet their needs.

The solution?

If your PI insurer has taken a unilateral decision to withdraw from providing coverage for pension transfers, there’s very little an adviser or planner can do other than look elsewhere.

However, assuming this isn’t the case, firms need to do everything possible to ensure renewal terms are commercially viable. That means engaging with your PI insurer, communicating regularly to ensure internal processes are aligned to their requirements (as well as those of the FCA), liaising on problematic cases and potentially reducing the numbers of transfers completed.

There’s also the temptation to suggest that advisers and planners avoid advising on high profile schemes. Naturally, British Steel springs to mind and I’ve heard from more than one firm that they’ve had the third degree from their PI insurer about their exposure. However, doesn’t every member of a Final Salary scheme deserve the best possible advice? Why should those in high profile schemes, such as British Steel, be treated as second-class citizens? A sensible and pragmatic solution in such cases must be found.

What does the future hold?

I really don’t know, but I hope common sense prevails.

There are many good advisers and planners working in this area and focusing on achieving the best possible outcomes for their clients. My hope, therefore, is that we see the PI market soften, but I fear we won’t, at least in the short term. In which case, advisers and planners need to do all they can to demonstrate how they manage risk and present themselves in the best possible light to their insurer when renewal time comes.

The financial planning profession (and consumers who will need advice in the months and years to come) can only hope it’s enough.