Defined benefit (DB) savers should be able to benefit from the same flexibility as defined contribution (DC), LCP partner, David Fairs, has said, calling for a rethink of ‘sticking plaster’ rules to allow more members to benefit from freedom and choice.

In a blog post, former The Pensions Regulator executive director of regulatory policy, Fairs, pointed out that, under pension freedoms legislation, anyone with a DB pension worth more than £30,000 is required to seek specialist financial advice before they can transfer their pension rights into a flexible DC arrangement.

However, he argued that the supply of high-quality advice has diminished in recent years, while the cost of advice has soared, partly as advisers have faced rapidly increasing costs, including securing professional indemnity insurance.

As a result, Fairs warned that members with more modest pots, for example in the range £30,000-£70,000, have found it difficult to source cost-effective advice, with some people being quoted thousands of pounds for advice on transferring a £35,000 pot.

In addition to this, Fairs said that individual DB scheme members are at risk of falling prey to scammers when transferring money, and can find it hard to discern who is a good financial adviser and who might be out to take advantage of them.

Given these concerns, Fairs suggested that more DB schemes should appoint a nominated firm of suitably qualified transfer advisers who members can use with confidence that ‘due diligence’ has been undertaken on the firm.

Fairs also argued that even if the scheme only covers the set-up costs of the new advice arrangement, members will generally then pay far less for advice than if they source their own advice from a ‘high street independent financial adviser (IFA).

Fairs also suggested that legislative change may be needed, calling for a change in the rules to allow people with modest DB pots to access drawdown under the umbrella of their DB arrangement either directly or via a carefully chosen third party such as a mainstream drawdown provider or (in due course) a collective DC (CDC) vehicle.

Under this proposal, the obligation to take regulated financial advice would be lifted where the option was within the same umbrella DB arrangement, but guidance would still be provided.

Fairs suggested that trustees could also be required to ensure that any third-party provider was authorised, that any investment options were appropriate and that charges were fair.

According to Fairs, this proposal would mirror the duties that trustees are already under when it comes to vetting potential transfers under the latest anti-scam rules, while providing a much smoother transfer process from the member perspective.

Fairs stated: “The current requirement on members to seek financial advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process.

"It would be much better to start with a fresh look at the outcomes desired and design a process to get there.

“For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes”.

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