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Analysis: Why you should not transfer from a defined benefit pension and how the FCA is clamping down on rogue advisers

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The Financial Conduct Authority today launched a major crackdown to stop rogue financial advisers pushing people into transferring their pension savings out of company defined benefit schemes and into other, less generous plans.

It is a huge, but largely unreported issue in the UK, resulting in thousands of people losing huge chunks of their lifetime savings. Many affected have had to continue working for years longer than they had planned to replenish their pension pot.

What is a defined benefit pension?

These are pretty much the most generous pension schemes in the country. Also known as final salary pensions, they provide you with a guaranteed annual income from the moment of your retirement for the rest of your life. That income is based on your final or average salary.

The employer contributes to the scheme and they will generally continue to pay an income to your spouse, civil partner or dependents when you die.

The payment generally increases every year.

They’re mainly only available to new members in civil service jobs as most private sector companies have closed them as they became too expensive.

The employee pays no charges or fees.

They’re basically one of the biggest perks of the OK Boomer generation.

And what is the transfer row all about?

Many employees have been encouraged by advisers to switch out of their DB scheme into other plans such as defined contribution schemes, where you as an individual decide where to invest and much to withdraw.

You have the freedom to invest in shares, bonds and property which may be appealing as their value can rise rapidly. But they can also fall dramatically too. Risks are far higher, and entirely on your shoulders.

Your employer will not contribute, you will lose the protections against inflation and you will have to pay sometimes extremely high fees to an investment manager and DC scheme provider to manage your pot.

Financial advisers get paid thousands of pounds in those fees if you make the transfer, and have in many cases been swayed by those riches to encourage people to switch even when it is clearly unsuitable. The people managing your money will demand annual fees for the rest of your life, further draining your savings.

What happened at British Steel?

The most famous is the scandal so far. British Steel had lost a fortune under its owners Tata and its pension scheme was massively costly and in deficit. A deal was struck with regulators in 2017 to offer to move employees into a new Tata scheme which had lower future increases in benefits than the existing one, or stay with the previous, which move into the Pension Protection Fund for collapsed pensions.

Both options offered a reasonable outcome for most members.

However, there was a third option – to transfer out of the DB scheme altogether.

Financial advisers smelling fat fees swooped on the employees to persuade them to transfer out, despite recent advice from the pension regulator that such a move was almost always the wrong choice. Around 8000 switched.

Many were left hundreds of thousands of pounds out of pocket.

Know any examples?

Andy Willerton has worked at British Steel in Scunthorpe for 30 years. Now 53, he was advised by financial advisers to transfer but after fees and tax deductions, his pot is now so much worse that he will have to work for six years longer than he’d planned to make up the shortfall.

Not only that, but a few months after he pulled his money out, the British Steel pension trustees did an upwards valuation of all the members’ savings which he says would have doubled his £248,000 transfer pot.

How many were badly advised, then?

The FCA looked at the paperwork behind a sample and today said it found only a fifth had been suitably advised to move. Forty seven percent had received bad advice and a further 32% had been handled so badly that gaps in the paperwork meant it would have been impossible to tell if they were better or worse off.

Al Rush, an IFA trying to help British Steel victims, reckons only between 5% and 10% were correctly advised to transfer.

So what’s the FCA doing about it?

For British Steel victims, it is writing to the 7,700 who transferred to help them revisit the advice they received and complain if they have concerns.

The best option for them could be attempting to sue the advisers who gave them such duff advice.

To try and stop it happening again, the regulator is changing how advisers get paid and incentivised to transfer their clients.

Previously, the adviser would only charge clients if they transferred, marking a clear incentive not to advise them to stay put.

Now, such charges, known as contingent fees, are banned. Customers will have to pay a flat fee for advice, whether they end up staying with the DB scheme or switching.

How will that work?

There will be a two tier system of advice. A new, abridged advice session costing perhaps £500 will see advisers either recommending the customer stays in their DB pension or, in the minority of cases where that is not obviously the best option, will recommend a full advice session. That will be charged at a far higher fee of perhaps £3,000 to £3,500 which again will be payable whether or not the end result is to stay put or transfer.

That’s a huge amount of cash for most people

Correct. Especially as, if the conclusion is that the customer should stay put, they will have to pay it in cash straight away. Those transferring will be able to have it taken out of the pension pot.

What else is the FCA doing?

The regulator said it was holding 30 enforcement investigations into bad practice on DB pension transfers. Today, the stock market quoted advice giant Quilter admitted it was one.

As the Evening Standard previously revealed, Quilter’s recently acquired subsidiary Lighthouse is being investigated over the British Steel scandal for actions of its advisers between April 2015 and April 2019.

Quilter today said Lighthouse advisers had recommended 300 British Steel workers transfer. It has set aside £12 million to pay for potential claims and says both it and Lighthouse have professional indemnity insurance cover.

Another advisory firm criticised by some British Steel employees was Gallium, which also acted as principal for Basset & Gold, the savings company that collapsed earlier this year. Gallium director Tony Norris has told the Evening Standard its work with the British Steel situation “has been investigated and Gallium is not responsible for any wrongdoing.”

He also denied wrongdoing in the case of Basset & Gold and said it was premature to comment before investigations into B&G were complete.

Is this a case of “bolting the stable door?”

To some extent, yes. The flood of bad advice given to DB pension holders is receding. The FCA said suitability had risen to 60% from 47% at the peak. But that still means 40% of people are being wrongly advised to transfer or having inadequate checks done by advisers.

Philippa Hann, a lawyer acting for British Steelworkers, reckons people have lost about £40 billion from being wrongly transferred, from Jaguar Land Rover to Ford, to Sony and Welsh Water.

Anything that can stem any more tragedies like British Steel has to be a good thing.