The pension review has been a painful experience for all involved in financial services. It has led to advisers looking toward a more professional and specialised future.
You will be aware that 2001 will see N2, the FSA and stakeholder come into being. The irony is that one of the biggest changes to family law will come into force on December 1, 2000, yet this seems to be almost forgotten.
The Department of Social Security estimates there are 160,000 couples who will divorce next year. For the first time, a new option will be open to couples in the form of pension sharing. The idea is simple. Couples will be able to apply for external transfers of funds from spouses' pension schemes to new sharing arrangements. Couples will be granted a clean break.
Pension credits -transfers in disguise?
However, in the dreamy haze of the new law being brought in and the wonderful opportunities opening for specialist financial planners, remember one thing – pension transfers cre ated the pension review.
The new scheme is built around pension transfers. The only schemes which will not offer pension transfers are those which are public service and unfunded by the member.
The remainder will be able to offer the creation of membership of the non-member spouse by internal transfer. The internal option is highly unattractive to trustees and the vast majority will offer external transfers only.
Personal arrangements and occupational money-purchase schemes are easier to deal with as they require an analysis of whether any ins ured benefits need to be replaced plus a market analysis of which provider receiving the pension credit gives the best overall value.
Where things become much more hazardous is with final-salary schemes. Where the scheme is funded and offers an external transfer then you need to be very careful indeed.
The credit will go into a personal pension arrangement and be subject to the variance of market performance. The debit final-salary scheme, on the other hand, will not be subject to such variance.
What if, in 10 years, the spouse retires and works out that she would have been better off staying inside her ex-husband's scheme and earmarking the benefits?
At a rate of 160,000 divorces a year, this sounds to me very much like the breeding ground for a pension review in years to come.
The role of the financial planner
The specialist planner will be in a superb position to assist law firms in this very difficult area. All pension credits will require regulated advice. The Law Society currently regulates law firms with in-house financial planning arrangements. There are around 4,000 lawyers engaged full-time in matrimonial work. There are only a handful of law firms holding G60 and pension transfer and opt-out authorisations.
The role of the financial planner is to educate law firms in how they will avoid the pitfalls of the new regime. The financial planner will be in a position where the product sale is secondary and the advice is primary. For many, the interaction of law and working as part of a team will be a new experience.
Bear in mind that with stakeholder ushering in the 1 per cent world and initial indemnity commission being reduced drastically, professional financial planners will need to realign the dynamics of their businesses with the FSA regime.
I have seen many articles positively encouraging financial planners to make approaches to law firms to discuss business opportunities.
What surprises me is that people do not understand the dynamics of the legal profession. The profession, although a collective mass, is split up into very distinct groupings. These groupings have no real interest in other groupings other than in supporting the mutuality of the profession.
The Solicitors' Family Law Asso ciation represents the vast bulk of family law practitioners. Association chairman Rosemary Carter said in the Law Society Gazette dated November 16, 2000: “The role of the IFA will be crucial, given the long-term importance of these decisions.”
There is little point in running to find your nearest family lawyer without understanding the way in which the solicitors' practice rules and the solicitors' investment business rules work. To do so, would be a waste of time.
You need to understand how commission is dealt with, how a consent order is drafted and how a court deals with pension-sharing issues. If all you can do is turn up at a law firm and suggest a home for the pension credit then you will not get very far.
Pension sharing is a very complex regime for lawyers. You have to be able to support them. In doing that, you will get involved with lawyers and their matrimonial clients at a much earlier stage.
The negotiation over the pension rights and the analysis on replacement of any insured benefits need to be dealt with at the preliminary stages. The credit will come at the end.
The nature of the transaction pushes toward fees being char ged. Not all cases will require a pension credit or replacement life insurance. Pension sharing is not about selling products, it is about advice.
The debate on multi-ties is of natural interest to lawyers. Naturally, we have a fairly simplistic way of dealing with advisers who are not fully independent. We cannot refer to them. Simple. Be aware that if multi-ties come in the form that I suspect they will, this will leave lots of financial planners deciding how they should conduct their business in the future. Those who want to get involved in the professional referral market have no choice but to remain independent.
Although no pension-sharing products have been launched as yet the market will get into full swing in 2001. Financial planners will need to make a choice as to whether this is their market.
A list of all pension-sharing specialists to law firms is available on www.uklegalworld.co.uk. A factsheet on becoming a specialist can be obtained by phoning 0121 585 6070 or by emailing email@example.com.