Improving DB Advice

Defined benefit pension transfers. Which words spring to mind when you read this? British Steel, contingent charging, unregulated introducers? The defined benefit advice space has been littered with these negative connotations for years, and in part, rightfully so. But what about those who are still operating in this space, those who still have managed to pass regulatory questionnaires and obtain compliant professional indemnity insurance cover? One year following the last regulatory policy statement, and only six months following FG21/3, do we find ourselves in the perfect market place where all advice is suitable and consumer outcomes are being prioritised?

The regulatory changes in this space have been considerable over the last few years, we have seen the introduction of; triage, abridged advice, attitude to transfer risk, suitability report summaries, the ban on contingent charging, PTS CPD requirement, PTS qualification requirement, APTA, TVAS, DBAAT… and breathe! Firms offering defined benefit pension transfer advice have, quite possibly, had to change their whole advice process in a matter of years, and there is still some fine-tuning to be done.

Working with firms active in this space, we at Apricity have identified several themes that are still consistent within the advice market, and are urging firms to engage with the ample (and then some!) guidance from the regulator. So, what are we seeing and how do we think advice firms could further improve their advice process?

Let’s throw it back to the FCA’s Assessing Suitability Review 2017. Whilst not specifically looking at defined benefit pension transfers, the regulator reviewed a sample of files, looking at the suitability of advice and the disclosure surrounding the advice. Essentially, they were asking; was the advice suitable for the client’s needs and objectives, and was the client informed about this in the correct way? In this review, the regulator found that 93% of files were suitable, taking that up to 95% if you include those that were unclear (not enough information supplied). Pretty good right? Then we looked at disclosure, and this plummeted to just shy of 53% of advice cases that were correctly disclosing their recommendation and fees to clients.

So, what is the relevance of this now, and specifically looking at defined benefits? Since this point, firms have actively engaged with our feedback on disclosure, amending Initial Disclosure, working on streamlining excessive suitability reports and we have seen some great examples of this. However, when it comes to defined benefits, the 2017 review has flipped on its head, and the suitability of advice is often the downfall (rather than simply disclosure). This is supported by the work done by the regulator in 2019 where they specifically looked at suitability of advice on defined benefit pension transfers. In this instance, only 60% of the sample was deemed suitable, with the rest having material information gaps, or being clearly unsuitable. When looking specifically at the extreme example of British Steel, the regulator found 47% of files to be unsuitable which is clearly far below industry standards.

We see the internal debate firms can have over whether to stay in a scheme, or transfer out, and this can often play out in the file – making the suitability assessment more questionable. Firms need to remember that the decision for a positive recommendation to transfer is binary, it’s either yes or no. The adviser needs to make that executive decision combining all the information from the client to ensure they have their income needs met in retirement. The starting assumption is that the member is better remaining in the scheme, with a specific need to demonstrate clear evidence if the recommendation is otherwise. If you are unsure, it is likely that the recommendation needs to be that the member remains in the scheme.

In January of this year, the regulator published their Defined Benefit Advice Assessment Tool (DBAAT) which sets out the factors the regulator is looking at when assessing the suitability of advice. Whilst it is not a requirement for firms to use DBAAT, it is not often firms are given an insight into exactly how the regulator is effectively grading their work, so we would urge firms to review the tool and have some of the key takeaways embedded in the transfer analysis process. It is a comprehensive tool, which gives the adviser a view on the exact standards required.

The regulator is still heavily involved in reviewing the defined benefit advice market. From recent FCA information requests, which saw a multitude of firms removing their transfer permissions, to past business review which are cropping up more and more, it is more important than ever that firms look at their internal process. In addition, firms should review previous files, ensuring all their MI is up to date, as it is very likely the regulator will do further information requests.

Whilst those still operating in the space need not be tarnished with the same brush as some of the previous, often questionable, advice – this does not mean that advisers can take their eye off the ball.

Some thoughts and takeaways:

  • Ensure you have detailed, clear client objectives, both personal and financial – consider the ‘why now?’
  • Split out needs and wants (they are very different things).
  • Detail why these needs/wants/ objectives cannot be met through the scheme.
  • If they can, but the client has their minimum income requirements covered, then full advice is required.
  • If they do not, then look at securing this via an annuity and if the client is wholly reliant upon this DB scheme (plus state pension) for their retirement income, is a transfer really the correct option?

Click here to download Apricity’s Defined Benefits whitepaper.

Maddie Delboy – Compliance Consultant