Fast Shrinking DB Advice Market Is "Dangerous" For The Consumer.

The shrinking market for defined benefit transfer advice is "dangerous" for consumers and needs to be rectified by regulators and pension schemes, a report has warned.


A joint report from Aviva and LCP, published yesterday (October 3), found the number of advisers willing and able to provide Defined Benefit Pension transfer advice has halved in just three years and is expected to shrink further in the future.


The report had surveyed more than 200 advisers, of which 100 were still active in the market. Of these one in three was unsure if they would still be providing transfer advice in a year’s time or had already decided to pull out.


Roughly half said they advised on no more than one DB transfer per month, while five respondents said their firm advised on at least 100 DB transfers per year, including one which advised on around 1,000.


Of the 116 advisers surveyed who had ceased doing DB transfer work five said they left the market in 2018, 31 in 2019, 58 in 2020, and 16 said in 2021.


The regulator's own data has shown DB advice firm numbers have shrunk from 3,000 in 2018 to 1,200 now.


Alistair McQueen, head of savings and retirement at Aviva, warned this development was "dangerous".


He said: “Individually sought advice continues to be the backbone of the DB transfer advice market, but it is a market under strain.


“The supply of quality ‘high street’ DB advice is in retreat, leaving many individuals isolated. The industry and its regulators must work together to ensure that those seeking DB advice are not left stranded and exposed.


"Nature abhors a vacuum, and this advice vacuum is dangerous.”


Regulators' attitudes


Issues around professional indemnity (PI) insurance were the main reason advisers were leaving the market, as firms have been unable to obtain renewal cover or the cost has been too high.


The report found the second factor driving advisers out of the market was the ‘attitude of regulators’.


The report stated: “Some advisers object to the regulatory presumption that transfers are unlikely to be in a member’s interests, whilst others disagree with the FCA’s judgments when historic advice files are reviewed.”


A small number said the abolition of contingent charging in October 2020 made them leave the market.


LCP and Aviva compared these answers with their 2020 survey and found while PI insurance issues remained at the top of the list, individuals were more critical of the role of regulators.

The providers said this was likely due to the abolition of contingent charging as well as further regulatory activity in light of the British Steel case.


The Financial Conduct Authority last week said it was pleased with the development in the DB transfer space.


Speaking on the Inside FCA podcast, Debbie Gupta, director of consumer investments at the regulator, said the regulated market was dominated by "lots and lots of small firms" which made it difficult for investors to navigate and easy for bad firms to hide from the regulator. But its recent "clean up" work had made the DB market more effective.


"While that is not great for the firms that are no longer operating in the market, it’s a much better outcome for consumers because they are now able to feel more confident about the firms that they need to go to for that kind of advice," she said.


Though the regulator has acknowledged issues around PII for advice firms and is currently considering solutions to this problem such as third party audits of advice which should reassure insurers of the quality of the advice given.


Solutions


The report stated one solution to the advice vacuum could be for schemes to appoint their own advisers for members to use.


This would allow members to source more affordable advice and the due diligence carried out by the scheme could provide reassurance as to the quality of advice which is being provided.


The report stated: “The scheme-appointed market is continuing to grow, and this will in part help to reduce the advice gap. But there is no doubt that more needs to be done to revive the wider advice market in this space.”


As part of the research, LCP interviewed seven scheme-appointed IFA firms and found the firms were seeing a growth in business, but arrangements varied from scheme to scheme.

For example, some schemes made advice available free of charge to members, whereas in others the scheme paid for the set-up of the arrangement and members then paid the ‘marginal’ cost of providing advice.


But advisers said access to PI insurance and the approach of the regulators would need to change for them to return to, or even remain in, the market.


Steve Webb, partner at LCP said: “It is becoming increasingly difficult for members to source affordable transfer advice and this means that schemes and regulators need to do more.

“Growing numbers of pension schemes are now teaming up with one or more carefully selected advice firms to offer free or subsidised advice on pension transfers and wider pension issues.


"Given the challenges which members are facing, the pressure on trustees to do more to support members will only grow”.


LCP had previously called on trustees to work more closely with advisers after it found last year a mere 4 per cent of eligible advisers had been appointed by a scheme.


NOTE: We claim no right or title to this article which appears in FT Adviser dot com. Author Amy Austin.


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