- The FCA has continued to reiterate its stance that most savers should not transfer out of DB schemes
- Yet transfers are going ahead and have led to severe ramifications across the industry
- It may be time for trustees to step up to the plate to protect savers and preserve the reputation of pensions
The worrying rise in the prevalence of pension scams over the last year is beginning to show an emerging liability for trustees with members who become victims of mis-selling.
Regulators and the government have long kept a close eye on defined benefit (DB) transfers, with the need to monitor and assess whether the majority of completed transfers are truly beneficial to the saver an ongoing necessity, fuelled by concerns that financial advice is not always of an acceptable standard.
While the most prevalent move to address this came in the form of the Financial Conduct Authority's (FCA) ban on contingent charging last year, several cases of concern in the pensions space continue to draw trustees ever closer in their level of involvement with transfers.
While trustees played a crucial role in identifying and reporting their concerns at the Rolls-Royce and British Steel pension schemes - both now notorious examples of transfers that went wrong - an understanding of the processes involved in pension transfer advice and the regulatory controls surrounding it is not an area specifically covered under The Pensions Regulator's (TPR's) requirements for trustee knowledge.
Writing for PP in May, Leabold Financial Management director and financial adviser Graeme Delf pointed to this, and said the circumstances around the Rolls-Royce scheme "teach us that, where this kind of adviser focus on a scheme becomes intense, it should be a matter of concern to trustees".
And indeed, when PP surveyed its Pensions Buzz respondents about whether compulsory trustee knowledge should include a detailed understanding of the processes involved in pension transfer advice and the regulatory controls surrounding it, more than half (52%) said ‘yes'.
But how might mandating trustee knowledge around scams make a difference to both mis-selling and the risks faced by pension savers?
Scam warnings reached a five-month high in June, according to XPS Pensions Group's ‘red flag' index, with one in three high-risk pension transfers since July 2018 identified as suitable to have satisfied the first condition of the Department for Work and Pensions' proposed legislation to reduce scams.
But while TPR has opened the regulatory door to allow trustees increased ability to step in should a scam be considered imminent, many trustees still fear the burden of responsibility far outweighs their mandated knowledge.
XPS consultant Helen Cavanagh argues there is "a need for ongoing robust management from trustees" to ensure they "have scam protection processes for all transfers". With DB scheme trustees in the spotlight as examples of poor transfer conduct or scams rise, the question of whether they need the same full regulatory and legislative knowledge of transfers held by advisers is up for debate in perhaps the most justifiable way.
"There is a need for the industry generally to take action in a concerted way to improve financial education, engagement, understanding and involved decision-making," says 2020 Trustees director Angela Winchester. "And certainly, there's an argument to say that a more informed and educated population might be slightly better placed to understand where an offer might be a scam."
A joint Wealth At Work and Pensions Management Institute survey last month outlined the fears trustees have for their members approaching retirement, finding 80% have concerns about their members' lack of understanding of the risks faced if they transfer out of their DB scheme.
Winchester says there is, therefore, "definitely merit in the trustees being able to understand the process".
"The question is what would the trustee then do with that knowledge?" she says. "How could a trustee add value in this situation without encroaching into the regulated advice perimeter?"
Buck head of knowledge resource centre Gary Crockford says overdoing trustee education around transfers runs the risk of negative impacts on their wider knowledge.
"Giving trustees an education that focuses solely on transfers at the expense of other important topics, is like giving them one piece of a hundred-piece jigsaw puzzle," he warns. "Too much focus on one fast-moving and complex subject could mean that trustees' understanding of other important subjects suffers."
The ban on contingent charging put into place by the FCA last October has already begun to make a difference on the number of pension savers even interested in moving to defined contribution arrangements.
Transfer analysis from Lane Clark & Peacock last month showed take up is currently at its lowest since 2016. Despite this, separate research from the consultancy shows the average size of DB transfer reached a gargantuan £566,000 last year.
FCA figures show some £20.1bn of DB pensions were advised to transfer between 2018 and 2020 while it also opened 67 investigations relating to advice misconduct claims.
But Crockford warns that building trustee knowledge by mandating adviser-level transfer knowledge may not be the answer to fixing either the misconduct within the advice industry or the scam epidemic pensions are grappling with.
"Unfortunately, even if every trustee were a transfer specialist, this alone wouldn't be enough to stop pension scams when trustees, TPR, and the FCA have all battled valiantly for the last 25 years against pension fraud but have made little progress," he laments. "Fraudsters have no rule book and will find new ways to work around any barriers put in place."
Trustees vs advisers
DB transfer advice is perhaps one of the most complex and debated areas in financial planning. Freshfields Bruckhaus Deringer partner Andrew Murphy says the long-held concern that the FCA has gone too far in its regulation of transfers is another factor that has had knock-on effects for trustees.
"Financial advisers advising on DB transfers are facing sky-rocketing insurance premiums and soaring fees and as a result, are pulling out of the market altogether," he says. Pointing to Personal Finance Society figures, Murphy notes more than a third of advisers offering transfer advice have stopped doing so in recent years.
"Of the firms that remain, advice tends to be risk-adverse, even when the individual is a seemingly prime candidate for a DB transfer," he says.
Are trustees able to step up? Winchester explains: "In order to get permissions for pension transfers, independent financial advisers (IFA) must have specific qualifications and those particular exams are, quite rightly given the complexity of the subject matter, among the most challenging of all financial planning exams.
"It would be a substantial investment in knowledge and learning if you really wanted trustees to get up to the same level of knowledge."
Crockford agrees it is vital for trustees to still remember DB transfers are "a hugely complex topic", adding: "The role of a trustee is not to be an expert in every area, but rather about making use of suitable experts where it's needed."
More education "is almost always a good thing", he continues, noting that this is "especially so if it helps trustees better understand the potential issues around DB transfers and how they might affect members".
Theoretically if a trustee has the same level of knowledge and qualifications as an IFA authorised to give pension transfer advice, Winchester says that could be used to provide "an element of independent oversight or review of a proposed transfer".
She continues: "This could include things like checking that the correct process has been followed in terms of fact finding, the written recommendation from the IFA and the basis for it, and looking for evidence that the member understands the consequences of the transfer going through."
At the end of the day, Winchester still says there is an argument to be made that more must be done to protect members from both mis-selling and scams which "does fall naturally to a certain extent at the feet of the trustee".
She adds: "Checking correct processes have been followed [on the adviser side] could in theory be undertaken by the trustee, notwithstanding the fact that it requires substantial training and knowledge."
A heavy burden
For lay trustees, the pressure to stay up to date with ever-changing regulation and policy requirements is already a significant strain. How then might these voluntary trustees respond to the requirement for further technical training?
"It seems unrealistic to expect member-nominated trustees and employer-nominated trustees to get sufficiently up to speed," Winchester says. "It is an assumed that it would be one or more professional trustees that would be doing this work."
Association of Member-Nominated Trustees (AMNT) co-chair David Weeks said his association supports "all moves to spread best practice".
"AMNT members devise procedures by which they seek to protect their scheme members from scams and fraud," he said.
Weeks said requests for transfers had been on a steady rise long before the impacts of Covid-19, dating most specifically back to the introduction of pension freedoms more than five years ago.
"Preventative measures are first, and usually the best, line of defence," he said of scam mitigation. "Remedial measures can be too late to make an impact."
Crockford agree it is going to take more than trustee education to fight the scammers in particular.
"What's needed is a concerted push from the government, HM Revenue and Customs, and the prosecuting authorities to assist the regulators in their efforts," he says. "That's if we're going to put even a dent in pensions fraud."
Should trustees need to understand transfer advice?
A selection of views from PP readers:
"Trustee knowledge needs to be enough to know the warning signs and what to do to investigate further."
"It is only necessary for detailed knowledge to be held somewhere across the trustee board."
"If trustees had a working knowledge of the advice process around transfers, this would help clarify where the boundaries lie."
"Trustees will want reassurance from the administrators that the processes are being followed, not detail of what those processes are."
"Detailed knowledge will help trustees understand what impacts transfer requests and how this will impact on their admin requirements."
"Trustees are not and should not be advisers."
"Trustees should have knowledge of the process, so as to be able to challenge the service providers."
"Detailed knowledge isn't needed, but certainly enough knowledge so the trustee can understand as well, if not better, than the member."