Why Pension Schemes should consider a Trusted Partnership to protect their members

Having been in the pensions industry from before the industry wide review of pension transfer advice of the 1990’s, I have seen many changes. However, some things  always seem to remain the same.

Despite an increase in regulation, defined benefit scheme members still transfer entitlements for the wrong reasons, arising out of both misunderstanding and misinformation.   

While I believe members should continue to have the opportunity to transfer benefits from a defined benefit scheme, circumstances also indicate that the process by which they receive information, education and advice needs improving.

Driving such change is the increasing responsibility placed on schemes to identify potential scams and raise the awareness of members seeking to transfer of such risks. While the Pension Regulator has introduced increased requirements for schemes to undertake due diligence on receiving arrangements, the conclusions reached by the Pensions Ombudsman in several cases points to the potentially exposure that may schemes may face where their approach is found wanting. 

In August 2019, the Ombudsman considered the case of Mrs H who had been recommended by an unauthorised financial adviser to transfer her Local Government Pension Scheme entitlement into an arrangement that resulted in the entire loss of the value of those benefits. The Ombudsman determined that, despite the scheme issuing the prescribed warning brochure to Mrs H, and receiving her written confirmation of having read that document, it had still failed in its responsibilities to undertake appropriate due diligence. 

In addition, the experience of so many British Steel pension scheme members indicates that the threat is not just from unauthorised financial advisers. The failure of so many authorised firms to provide appropriate advice also presents a risk to scheme members. 

Nonetheless, there are steps that schemes may take to mitigate this risk. It is not just a case of raising awareness of scams but educating members about the potential consequence of a pension transfer and what to expect from an advice process. While the Financial Conduct Authority has produced a freely accessible video specifically for this purpose, this can be enhanced through a process known as ‘triage’. 

Triage is not advice. However, its purpose is to provide individuals with information necessary for them to evaluate whether they should take advice. Given the high cost of advice, and rules now banning contingent charging, it is critical that members are placed in a position to make an informed decision before committing themselves to costs. This is because a recommendation to retain an entitlement may result in the member having to fund significant costs from their own pocket, as opposed to from the value of their transferred  fund.

With this in mind, it is also important that members have a benchmark against which to assess whether the charges of individual firms are competitive. There is a significant variation in the fees charges by different firms for pension transfer advice, and the reducing number of firms in this market means that access to competitive rates can be a challenge. It is here that members can become prey to scammers and poor advice offering a transfer without exposure to direct costs.  

Trustees and scheme administrators are unlikely to be in a position to undertake triage as such conversations need to be conducted with care in order to avoid breaching the regulatory requirements that delineate the perimeter between advice and information. However, it is here that schemes can look to form relationships with advisers who specialise in this area, with the range of assistance extending trustees understanding of transfer advice issues, and assisting in the development of improved due diligence and claims defence measures.  

By Graeme Delf

Financial Adviser at Leabold Financial Management.