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Alistair Cunningham: Are the wrong people being pushed out of DB transfer advice?

I am conscious I have been a pessimistic voice on the topic of defined benefit transfers, but I find the recent drop in the number of them as puzzling and concerning as the rise that came before it. There are many who say it is natural for the demand to reduce because those who should transfer have done so already. But I do not follow this argument. Nothing stopped people transferring before April 2015, yet most did not.

Accessibility and flexibility existed if an individual had £12,000 of guaranteed level income (if they did not meet this benchmark, a transfer would almost never be appropriate).

The only thing that changed at that point was death benefits, but it is widely understood life insurance can meet a need for lump sum death benefits, so I cannot see a transfer being appropriate for this reason.

Furthermore, pension rules have changed so many times, we should be confident they will be different when most people pass on. Nevertheless, it appears it is not just advisers who are nervous, with several firms stopping receipt of DB transfers, or at least refusing insistent clients.

I understand the wish to stop receiving these transfers (although with some saying they account for one third of their inflows, it must be painful), but it is the inconsistency in the way some providers deal with them that I find most worrying. Selectively deciding which transfers to process and which to avoid seems a lot like advice to me. The Pension Transfer Gold Standard is a worthy framework introduced by the Personal Finance Society but it would have been useful earlier. I support the aims of its Pensions Advice Taskforce but not all its proposals. Why, for example, is it desirable for “advisers to ensure the widest possible access to financial advice”, or to have a conflicts-of-interest policy unique to DB transfer advice?

I said some time ago that it was clear most people should not transfer and an early filtering factor would be for a client to elucidate why they were not “most people”. Now, most people have realised most people should never have transferred.

Apart from a few high-profile cases like British Steel, FCA involvement has been fairly low-key.

Contrary to popular perception, though, I do not believe British Steel was unique. While there were high-profile examples of extremely poor practice, it is the quality of the average advice that is a worry.

The FCA published its findings on what did not meet its current expected standards, but these standards could rise – and retrospectively.

I am not saying this is right but it is a risk, and therefore poses a significant concern that soon its view of finding transfers acceptable on a “no harm done” basis will change.

To me, it seems reasonable, given its high-risk and irrevocable nature, that someone transferring should find themselves demonstrably better off. This is, and should be, a significantly higher benchmark than for pension or Isa switches.

With awards increasing at the Financial Ombudsman Service, it seems obvious smaller firms are being pushed out of ongoing advice in this area. This should be of concern for two reasons: firstly, industrialisation of DB advice can lead to bad outcomes and, secondly, payment protection insurance-style compensation on DB transfers might be astronomical.

Alistair Cunningham is director of Wingate Financial Planning

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. I would say that new legislation in 2015 alerted more people to the options available, and coincided with high transfer values, so a perfect storm was created.

    Many members of DB schemes understood that this was a window of opportunity for them to take control of their funds, and from my experience this led to a number of more sophisticated investors following that course. I predicted that this would tail off as the better quality clients knew that the situation may not last and acted accordingly.

    The problem for the industry is that this was seen as a momentum shift in favour of transferring, allowing unscrupulous advisers to go unnoticed until it was too late, and a tightening of the DB transfer market followed.

    I am in favour of a triage or client education system, which is part of the Gold Standard, which should eliminate many enquiries before reaching the advice stage, and the costs associated, even for a small pot.

  2. To answer the question …yes !

    I know of three very competent advisers who have ceased doing DB transfers, listing PI, regulation, and FCA scrutiny being the culprit !

    So if good advisers, with appropriate permissions and a unblemished track record are dropping this hot potato, we can all guess who and what caliber of adviser is picking it up ? And a lot seem to be (from my own experience) overseas companies ……

  3. Any compensation should be in the form of an annuity, based on the old scheme. There should not be another pot of money to waste.

    A calculation to see what they have over spent, benefited from by taking funds early, or above the schemes offering, then an agreed income for life, 50% spouses benefit purchased.

    The issue being currently why would any DB Transfer client NOT complain? Instead of being offered a cash sum, faced with the loss of the flexibility of income, lump sums and death benefits I would suggest many would be truthful and not have selected memory loss.

  4. “Many members of DB schemes understood that this was a window of opportunity for them to take control of their funds”

    read: it was a window of opportunity for advisers to scare cliemts into moving whilst CETV’s were high.

  5. Julian Stevens 17th June 2019 at 1:12 pm

    The idea that a WoL policy in lieu of a big retirement fund returnable on death doesn’t hold water. Even for a married couple in, say, their sixties, the cost of a WoL policy based on a sum assured of, say, £300,000 would simply be unaffordable, even more so if one or both lives are smokers or have health conditions. They simply wouldn’t go for it. For a single person, the cost would be astronomic. Like it or not, RoF is a major factor in the decision on whether to take the CETV.

    • “The idea that a WoL policy in lieu of a big retirement fund returnable on death doesn’t hold water.”

      and neither does selling DB transfers on the basis of return of fund.

      First and foremost pensions are to provide an income in retirement. Where clients have other secured income then great, passing on benefits is a brilliant result of pensions freedom.

      Anyone selling DB transfers on the basis of return of fund is asking for trouble when these are reviewed in future.

      • Julian Stevens 19th June 2019 at 6:09 pm

        Is your position that the RoF factor should be ignored?

        • Alistair Cunningham 25th June 2019 at 11:21 am

          “Even for a married couple in, say, their sixties… would simply be unaffordable”

          Isn’t the first point that for many a transfer is unaffordable, and what guarantees can we offer that death benefit rules do not change in the average lifespan (particularly when they’ve been tinkered with 4 or 5 times since 2006).

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