Sony and Michelin source IFAs to support member decision-making

More employers and trustees have started to take an active role connecting members to independent financial advisers, in efforts to steer savers away from unscrupulous IFAs and help them make the right choices. Moving in line with this trend, trustees of both the Sony UK Pension Scheme and the Michelin Pension and Life Assurance Plan have recently announced they are providing support by sourcing an IFA for their members to assist them with retirement decision-making.

Doing nothing is still an active decision. There are actually risks of doing nothing and leaving members to go it on their own, facing high charges or unsuitable advice

Ben Roe, Aon

The circa £656m SUPS has written to members approaching retirement, offering them free advice from WPS Advisory. Its 2018 pension report states: “Over the past three years there has been an increase in the number of people transferring their benefits out of DB pension schemes – including the SUPS.”

One of the main reasons for the spike in DB to defined contribution transfers over the years has been the introduction of freedom and choice in DC schemes. “These options are obviously attractive, but making the irrevocable decision to transfer out of the scheme might not be in everyone’s best interests,” the SUPS report adds.

It notes that the company and the trustees of the scheme “have therefore decided to provide members approaching retirement with more information about their options”.

The Michelin Pension Plan has also been vetting IFAs, according to its 2018 member newsletter. However, the service is not free. Instead, if members wish to use the scheme’s chosen IFA, they can dip into their pension pot – up to a value of £500 – to fund the advice.

The scheme has told members that “getting advice will be simpler and cheaper”, given that the chosen IFA will understand how the scheme works and will work with the plan’s administrator.

Protecting savers from unsuitable advice

Members of the Michelin scheme were warned about the risk of pensions cold calls and “less-than-scrupulous advisers”. Last year, the Work and Pensions Committee said lawmakers’ and regulators’ handling of BSPS’s demise had left members confused about their options, and had done “too little too late” to stop untrustworthy advisers.

In an independent report on BSPS, published in January, former Money Advice Service chief executive Caroline Rookes said: “It would have been helpful if the trustees had compiled a list of advisers.” Trustees have taken notice.

There is a growing trend of trustees and employers giving members access to an employer-hired IFA, due to concerns over the quality of individually sourced advice. Trustees must realise that doing nothing is an “active decision”, experts say, as the reputational risk of foregoing connecting members to IFAs increases.

It has been four years since George Osborne allowed pension savers to transfer money out of their DB pension pots. Across the industry, transfer values were close to record highs in May, according to XPS Pensions. The consultancy’s Transfer Activity Index showed a slight rise in the number of transfers that the administration business processed during the month, compared with April.

But, with 2,426 firms offering advisory services, it is difficult for members to sift through good and bad advisers. “This is a key opportunity to provide that support to members and make sure they don’t make the wrong decision,” says Mark Barlow, senior consultant at XPS.

In a climate of high transfer activity, trustees are taking action to make sure members are informed. In 2018, 13 per cent of schemes provided members with transfer figures or IFA support, and is projected to rise to 28 per cent by 2020, according to Aon.

Doing nothing is an active decision

Trustees are legally prohibited from providing members with advice on their retirement, which has led to reluctance to recommend IFAs for fear of being associated with bad outcomes. But this argument was turned on its head by the BSPS saga, commentators have said, which saw some untrustworthy advisers preying on members to recommend unwise DB transfers.

Figures released by the Financial Conduct Authority in June found that 1,454 of the 2,426 companies offering advisory services on DB transfers had recommended transfers to more than 75 per cent of their clients.

Ben Roe, senior partner and head of member options at Aon, says trustees face a tough but unavoidable decision. “Doing nothing is still an active decision. There are actually risks, as we saw with the BSPS case, of doing nothing and leaving members to go it on their own, facing high charges or unsuitable advice,” he notes.

James Ellison, chair of the Pensions Administration Standards Association’s DB transfers working group and head of operations at WPS Advisory, says that to some extent trustees are “damned if they do, and damned if they don’t”, but taking no action could force members towards “the vagaries of the individual IFA market”.

After all, advisers often have a financial incentive if they recommend a transfer. “The adviser has a commercial interest, which conflicts against their regulatory obligation to do the right thing for the individual,” Mr Ellison says.

Contingent charging, for example, means the financial adviser is only paid if the member acts on their recommendation. After the initial legwork of vetting IFAs and informing them about the scheme, costs are subsequently driven down.

“While there’s some work upfront to get that IFA up to speed with the scheme and its benefits, once that’s actually in place, it helps with the ongoing business as usual administration,” Mr Roe says.

The route trustees choose, however, depends on the nature of the scheme itself. The most common option is for schemes to make a single IFA available to members, which is what the SUPS has done. But Mr Ellison says Michelin’s option is increasingly popular with smaller schemes. This way, even if the scheme and employer are unable to offer the service free, they can pass on the economies of scale.