Phil Young: DB transfers should be the best example of financial planning


Many of those most qualified to advise on defined benefit transfers are shunning the opportunity to do so. And I understand why. Professional indemnity insurers are twitchy about this becoming the next big source of claims and many planners have enough to worry about without adding risk and cost to their cover.

Still, it strikes me as a real shame and a missed opportunity to promote good planning. Indeed I cannot imagine many areas where planning could be so valuable and necessary. You could argue that advice on a DB scheme is best suited to full financial planning, because:

  1. It needs to be holistic, taking into account all of a client’s assets, liabilities, income and expenditure. It needs to consider all of the alternatives: simply quoting the availability without obtaining the costs of alternative means for providing those benefits is insufficient.
  2. It needs to be critical and challenging. A plan is not an order form and an adviser serves no real purpose if he or she allows clients to make poor, impulsive decisions without warning. The questioning skills of a planner should be invaluable as part of this process.
  3. It needs to be tested. There is no better way of “proving” the plan than a cashflow model. We all know the flaws inherent in cashflows but just the rigour that comes from collecting the detailed information required to construct and present one is significant in itself. It makes difficult questions unavoidable, it puts a focus on the long term and it makes both adviser and client take it seriously.
  4. It needs constant review. The investment risk moves from the employer to the employee and that money needs to be managed well.

Advice on this basis is not cheap. However, I believe the majority of the current market is underserved not because of the cost of advice but because of a lack of thorough planning and fear of future claims.

At one end of the spectrum there are those who are critically dependent on their DB scheme pension with little or no alternative sources of income to rely on. For these people the critical yield and the current transfer value analysis output is likely to be a reasonable guide. The cost of this may be a deterrent but it is compulsory before any transfer.

At the other end of the spectrum are those with such significant wealth their DB scheme is irrelevant to future lifestyle. A traditional TVAS is less relevant and paying for advice should not be an issue as it is both affordable and should be tied into a broader piece of financial planning.

In my experience, both of these types of clients are quickly screened in or out for a potential transfer using “rule of thumb” assumptions for risk versus reward. Those with little wealth are politely pushed away or warned in advance they will most likely be told the transfer is unsuitable. Very wealthy people are taken on as they can pay for the advice and are attractive long-term clients. In addition to the reward, a transfer for those who are not reliant on the income provided involves less risk to the adviser.

For those in the middle, however, the likely outcome is not so clear and a lot of hard work and uncertainty lies ahead in the advice process. There is a lack of advice available for this type of client, as they require full financial planning and rules of thumb serve little purpose.

It is paradoxical that the people with the greatest need for technically sound financial planning and the means to pay for it have the greatest problem finding it. The consequence is they will end up with a firm who simply processes the transfer unchallenged or assume that a refusal to advise on a transfer by their planner equates to it being a bad idea.

The FCA has taken an interest in improving pension transfer advice and clearly sees good and bad practice. But there is little for PI insurers to use to separate the good from the bad, as this is currently still predictive work on new firms which is not yet borne out by a poor claims record.

Committing to only providing advice on DB transfers as part of a full financial planning process that takes into consideration the four points mentioned earlier seems to me to be a way of demonstrating better risk management and is indicative of fewer future claims. It is likely it will involve saying “no” to transfers as well, so concerns around insistent clients also need to be addressed.

The result should not just be sustainable PI terms for those firms doing the right thing, but no PI cover made available to those who do not. Right now it is still too hard to sort the wheat from the chaff.

Phil Young is managing director at Threesixty



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. I completely agree with this apart from the bit about quickly determining whether they shouldn’t bother- how does that work as that is advice without all the care and duty- the fact that you may be suggesting they stay where they are is no less important as recommending they move it- aren’t both of them advice scenarios?

  2. Totally agree with this Phil. I’m concerned that many advisers have a default ‘No’ position when it comes to DB transfers, when it may well be the right thing to do. Surely that is fairly easy to determine, and we have charged people to tell them to leave the plan where it is. Our default starting position is that a DB scheme should remain where it is, but some cases (we’ve completed on four so far) are so clear cut it would be lunacy not to transfer out. For those tricky clients in the middle, only the mathematical rigour of a cashflow, completed by a technically competent planner and with the client understanding fully the implications of wrong assumptions, is the only answer.

    These days, I don’t know how anyone can advise anybody without the power of a decent cashflow model.

  3. I may be controversial but I feel that far too many advisers holding themselves out to be independent or wealth managers simply abrogate their responsibilities to the client by refusing to look at DB transfers. They want to cherry pick the investments and will not or cannot do the hard work. DB transfers require a serious look at the client’s circumstances including wealth, capacity for loss, health, estate planning etc. which fits in so well with financial planning. Yet how can Joe Public go to an adviser confident that they will deal with you with your best interests placed first when advisers are cynically refusing to look at possible DB transfers through fear (e.g. unjustified concern re. FOS), irrational prejudice or (justifiable) PII ramifications. What is worse, and we have seen this, advisers are unwilling to refer clients because they feel they would lose control of the client and indeed find their porous planning “stirred” up. And they may be right because referring a DB Case to us requires that we look at all the client’s financial planning and not the DB in isolation. With DB transfers, forget the TVAS as that alone will not answer the question as to whether one should transfer or not. And accept it will cost money but the benefit to the client can be significant.
    The FCA should be concerned about consumer detriment because the PII implications are worrying and distorting the market and the attitude of too many advisers is prejudicial to the best interests of the clients.

  4. Thanks to Phil for this; we’ve found working with him and his team has made it much easier to sort the wheat from the chaff. As actuaries and administrators we take our responsibilities in helping occupational pension schemes very seriously. I hope we’ll be able to continue to work with good IFAs who are skilled, qualified and motivated to help clients with these very difficult decisions.

  5. Where an adviser recommends no transfer from DB to money purchase then that is a recommendation FOR the DB scheme! Beware! Advisers could find themselves subject to a claim here – e.g. the Monarch Airline pilot whom was expecting £80k a year from DB but where the scheme fell onto the PPF and is now going to get £33,678.38 a year and whom was advised no to transfer…..
    Then we have DB schemes running a deficit and their plans for that deficit – such as Standard Life staff DB scheme. Standard Life pumped £ millions in and eradicated the deficit – so scheme now in surplus. Knock on effect is anyone having left that scheme in last few years has taken a significant hit on the transfer value – did the adviser have on file Standard Life’s plan for reducing the DB deficit? If not – watch out. Of around 7,400 DB schemes in U.K. most are in deficit.
    Recent ‘RAA’ deal via The Pensions Regulator/PPF for Halcrow DB scheme saw employer get out of their ‘guarantees’ in respect of escalation (deal struck to keep scheme out of the PPF). That will become more common.
    Getting as much info on funding and plans to cut deficits is key. Advisers ‘knocking out’ transfer value analysis reports for £250 or D2C insurers like LV offering this service for free are asking for trouble!

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