Defined benefit pension schemes are in a sorry state right now, with large and ever increasing deficits, high profile failures and substantial numbers going into the Pension Protection Fund.
The FCA’s belated decision to start reviewing pension transfer specialist firms has only exacerbated the situation.
The introduction of pension freedoms in April 2015 has led to a huge demand for advice from final salary pension scheme members, which has resulted in a substantial increase in transfers into personal pensions.
Companies have also been offering historically high transfer values, which has significantly de-risked the decision to transfer them. Near record low gilt yields have contributed here.
Advisers have quickly grasped the benefits to certain clients of theirs who are most suited to consider transferring their schemes into personal pensions.
Typically, the advantages include higher death benefits, no inheritance tax, inheritability by spouse, children and their descendants, very low critical yields and no early retirement penalties, alongside a lot more. The astute advisers who specialise in this area and support their advice with lifetime cash flow planning have been able to demonstrate these clear advantages to the right types of transfer clients.
And what is the right type of client? Well, as a generalisation, those with a medium or above attitude to investment risk, who are married and have children, are higher earners with many years of service in a DB pension scheme and at least high net worth, if not ultra high net worth, with a high capacity for loss are particularly suited to transfer.
The problem is that the FCA has taken more than two years since the introduction of pension freedoms to suddenly decide it does not like the way advisers are advising their clients on such transfers, which has led to most specialist firms being “voluntarily suspended”. Clearly, this means such firms have been compulsorily suspended either temporarily or permanently.
As far as I can tell, though, few firms have actually had their permissions taken away. It seems that the advice to transfer is not being disputed on the whole. It is primarily the way the advice is being given that is not acceptable to the regulator. So it is really about the administration.
Many firms have been suspended for months and there is no sign of when, if ever, they will be allowed to continue trading. This is very dangerous because some of these firms are likely to go out of business. Even if they were to survive, their business reputations will have been irreparably damaged.
In the meantime, many clients will lose out if their transfer values fall or their employers go bust and the PPF does not bail out their schemes.
The FCA has decided it does not like final salary pension transfers and has created a fiasco which is likely to lead to many complaints against it in years to come. The sooner it lifts these “voluntary suspensions” the better.
Tony Byrne is managing director of Wealth and Tax Management