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Are DB transfers snowballing out of control?

Calls for FCA clarity grow as concerns raised over future liabilities

There is a growing sense of foreboding among advisers and providers that advice on defined benefit transfers is building up problems for the future.

Aegon chief executive Adrian Grace is the latest to join the clamour for more regulatory clarity on DB transfers, though not all advisers are convinced more guidance from the FCA is warranted.

Advisers are now starting to mobilise among themselves to ensure they stay informed and to glean best practice from their peers.

Providers have also pointed to a dysfunctional market, with consumers failing to get the DB transfer advice they need.

Money Marketing has examined how the DB transfer market is evolving, the industry’s concerns and whether the regulator has been clear enough in its expectations of advisers.

A question of clarity

Aegon pensions director Steven Cameron says the market is not working for consumers who are considering transferring out of their DB scheme.

He says: “Part of the FCA’s mission is to ensure markets function well, consumers are protected and to promote efficient competition. When we look at the DB transfer market, this is clearly not happening.

“Demand for advice on DB transfers is exceeding supply by quite some margin. People clearly want advice on this issue but cannot access it.”

Echelon Wealthcare principal Al Rush has organised a free conference for advisers, which will be held in Peterborough next month.

He says: “There is clearly a lot of concern around this area. Originally we had the idea of getting a few advisers round a table, but it snowballed from there. We’ve now already got almost 200 people attending. It will be an opportunity to hear from leading practitioners in this field – including former pension ministers and providers – and allow advisers to share their concerns and best practices.”

Rush says he would welcome clearer guidance from the FCA on DB transfers, as many “conscientious and diligent” advisers are wary of the consequences of giving advice on this issue. He says: “There is no future-proofing.”

He says he would like to see a clearer picture “about what good advice looks like” for those looking to switch from DB to defined contribution pensions.

Deep in thought

The FCA is expected to launch a consultation on DB transfers within the next few months.

Cameron says: “Hopefully advisers will engage with this process, so we can come to some agreement about what the advice process should involve when advising on DB transfers.”

There are a number of specific areas which he hopes this consultation paper will address.

He says: “The FCA has said advisers shouldn’t solely rely on critical
yield figures when making transfer recommendations. But we need greater clarity and a common understanding of what other factors should be taken into account, and how they should be used in this analysis.”

Cameron argues this would give advisers more confidence that the recommendations they make today are not going to be subject to future complaints or misselling issues.

He adds: “Ultimately it should also benefit consumers who should find it easier to access robust and consistent advice on this complex area.”

But not everyone agrees the rules surrounding DB transfers are not fit for purpose.

Red Circle Financial Planning director Darren Cook says: “The current guidance is very clear. The FCA states advisers should assume a transfer is unlikely to be in the client’s interest. You should only recommend a transfer if you can make a clear case otherwise. This doesn’t seem to contain too many grey areas.”

Informed Choice managing director Martin Bamford says: “We are not opposed to more guidance, or more detailed guidance on this issue.
But as far as we are concerned the guidance as it stands is fairly clear. We don’t think further clarification is necessary.”

Wingate Financial Planning director Alistair Cunningham says: “The current criticism of FCA guidelines isn’t coming from firms like ours. We take a low-risk approach to DB transfers, and will start on the assumption that it is rarely in the client’s interest.

“There is a widespread perception that things have changed since the introduction of pension freedom rules, but I am not sure I entirely agree.”

Cunningham says the “broad and overarching approach” adopted by the FCA – which focuses on critical yield figures – seems “entirely sensible”.

Cunningham is against any regulatory change that effectively makes it easier for advisers to recommend a DB transfer.

He says: “Why are people pushing for the FCA to change its stance on pension transfers? Is this really about clarity? Or is it about changing rules to make it easier to recommend DB pension transfers?”

But providers and advisers agree the surge in demand for advice on DB transfers in the last few years has created challenges for the industry.

This was originally prompted by pension freedoms, but has been exacerbated by the downturn in gilt yields last year following the Brexit vote. This led to many pension scheme revaluations and a subsequent increase to transfer values.

Charges uncovered

With demand for advice on DB schemes outstripping supply this has clearly had an inflationary effect on advisory fees.

Many in the advice sector agree fees have been on an upward spiral. At Informed Choice, for example, they charge a fixed project fee for DB transfer advice.

This is now a minimum of £2,500, up from £1,500 to £2,000 two years ago. Charges are higher for more complex cases.

Bamford says: “This is because demand has increased, the values involved are bigger reflecting the fact that these are more complex cases, with more risk involved.”

Rush says he charges a fixed fee of £1,350 for pension transfers, which has not increased in recent years.

But he says:  “It’s certainly my impression that fees have risen across the industry. Given the complications involved, and demand, it seems legitimate for advisers to charge more for their services.

“Many people are aware they have significant choices to make at retirement and are happy to pay for this advice. Most advisers are also in the fortunate position of being able to pick and choose more affluent clients.”

A fee fudge?

Echelon Wealthcare also charge fixed fees to review transfer options, regardless of whether the eventual recommendation is to stay put or to switch. Some firms are charging on a contingent basis, often a fixed percentage of the transfer value. This has given rise to concerns that such charging models can create conflicts of interest.

Cunningham says: “We need to look at some of these fee structures. With some of these contingent fees the adviser gets nothing if the recommendation is to stay put. But if they recommend a DB transfer they get paid up to 5 per cent of the transfer value.

“There’s got to be a few questions asked about this.”

There are concerns this pent-up demand has also opened the door to less scrupulous providers, who are keen to facilitate such transfers, even if they may not be in the clients’ best interest.

Many unregulated firms are now targeting individuals offering a “free” pensions review, but there has also been a slew of transfer specialists offering their services to the advisory market. Some of these firms are regulated, but others are not.

One recent email seen by Money Marketing offers advisers a “dedi-
cated pension transfer service” with the option of splitting the 5 per cent fee charged on any transferred pension.

Is this really about clarity? Or is it about changing rules to make it easier to recommend DB pension transfers?

The firm clearly highlights many of the regulatory concerns expressed by the advisers, with the introductory email stating: “Although many advisers are qualified to advice on pension transfers, many choose not to, especially in the area of defined benefit transfers.”

The firm claims it will take “full responsibility for our advice and normally hand the client back to you to agree a suitable investment strategy”.

Syndaxi Chartered Financial Planners managing director Robert Reid is concerned about the number of advisers who seem to be outsourcing this pension decision, but then continuing to advise clients on their investments.

He says the regulator has pointed out DB transfer decisions should not be made “in isolation” and that those advising on pension transfers should take into account any investment advice given by a third party. But as the FCA has not specifically ruled out such arrangements, Reid thinks there could be further regulatory clarity on this.

Other issues that may come up in the forthcoming consultation include how to deal with insistent clients.

Bamford says: “One grey area concerns insistent clients. People need to show they have got advice if they want to transfer a DB pension scheme worth more than £30,000. If someone wants to go ahead despite advice to the contrary it isn’t too clear what the procedure is.

“Some advisers are reluctant to sign the relevant piece of paper, showing the client has had advice, as they know they will use this to transfer the funds anyway.

“Many are worried that even though they advised against it they could face consequences at a later date. Similarly what is the ceding scheme’s responsibility if it is clear the customer is expressely acting against the
advice given?”

DB transfers: One client’s perspective

Having just gone through the process of a DB transfer, I can categorically say the process, regulations, guidance and system are all in desperate need of being dragged into the modern world.

I did eventually get the transfer pushed through, but I found the whole thing frustrating and unrealistic.

First of all, it was extremely hard to find an adviser who would take it on. Most were too scared to do so. Of those willing to take it on, the fees, whether as a minimum lump sum or as a percentage, were mind-bogglingly high. I did finally find a good adviser, after about a month, eating into the three-month window on the valuation. He understood my situation immediately – namely, that I am single with no dependents and have a decent alternative pension pot and non-pension portfolio already. Most importantly, he understood I am an experienced investor who appreciates the risks of such a transfer, and that recent fluctuations in gilt yields had increased my transfer value by 60 per cent in 12 months.

The forecasting report was then sub-contracted out to another firm who took an agonising three months to complete the task and sign it off. This took me well beyond the three-month window I had on the valuation. I had to beg and plead for them to review the valuation and extend the window. I was also shocked the valuation work was based purely on annuities. I have no intention of ever taking an annuity so why should the FCA force firms to create comparisons using rigid, historic annuity rates?

The compliance director at my adviser’s company was scared stiff he was about to recommend the transfer, albeit with countless pages of caveats. I effectively had weeks of persuading them via email correspondence that I was of sane mind and knew what I was doing.

In all it has taken just over six months to get the thing done. It is more worrying people without any financial knowledge may be told DB transfers are a bad thing and get scared off – simply because the advice firm dealing with the case is too cautious to suggest otherwise.

Stephen Desmond

Expert view

With contingent charging, a lot depends on the context. For a sole trader that gets a client walk in with a £500,000 defined benefit transfer, which may be the first case of its kind for six months, they may be mighty keen to get that contingent charge. For some, it would be very difficult for the level of fee not to play on one’s mind. But a bureau service that does 100 DB transfers a quarter would price into their contingent charging model the fact that for so many the suitable option will be to tell them not to transfer. Contingent charging can work well in certain scenarios, with specialist firms doing volume or when clients do not have a huge amount of ready cash to pay non-contingent fees.

You could say it is just hidden commission and just ban it, but that would be a bad move. The FCA is keenly aware these things are not straightforward,and that is why the regulator can seem vague or contradictory on this.

The FCA is slowly learning that what matters is context. In the context of people who take advice because they have to, it is clear they are set on taking benefits out of their DB scheme regardless of the advice given.

Jonathan Purle is director at Purle Consulting


Profile: Ian Wilkinson on the perils of pension transfer advice

Rutherford Wilkinson’s boss on why he decided to stop doing DB transfers, and why he feels he’s been vindicated A year after chartered financial planner Rutherford Wilkinson stopped advising on defined benefit transfers, managing director Ian Wilkinson is convinced it was the right thing to do. He says: “We took the decision to withdraw from this […]


Claire Trott: Is advising against DB transfers really safest?

The view that its safer to advise clients to remain in a DB scheme may no longer hold true I have been talking at seminars recently about the benefits and pitfalls of a defined benefit transfer: things to watch out for and what needs to be included in the report. The common stance is still […]


Aegon calls for FCA clarity on DB transfer advice

Aegon has urged the FCA to provide clarity on its expectations around advice on transferring out of a defined benefit pension as demand for transfer advice continues to soar. In its results for the first three months of the year, published today, Aegon saw record new business flows of £1.2bn onto its ARC platform. The […]


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  1. Rory Percival 18th May 2017 at 8:40 am

    I don’t buy this ‘FCA need to provide more clarity’ comment. The FCA have said advice must be suitable and clearly in the client’s best interests. It also requires firms to prepare and provide a TVAS but has pointed out – several times – that advisers shouldn’t look at the critical yield alone. Whether a transfer is suitable or not is a planning issue; there is no regulatory formula for this, nor should there be.

    Clearly advisers are concerned about how the FCA (and FOS) will judge individual cases. But if the advice is demonstrably suitable then this is not going to be an issue.

    The outstanding regulatory issue is TVAS which hasn’t caught up with pension freedoms. Changes are being considered by the FCA (I expect something from the FCA next month, after the election).

    • “Clearly advisers are concerned about how the FCA (and FOS) will judge individual cases. But if the advice is demonstrably suitable then this is not going to be an issue.”

      Well, that’s the whole point isn’t it. The problem is that we don’t fully know how ‘demonstrably suitable’ is going to be judged in the future when the FCA and FOS look back at advice being given now.

      For example, suitability depends on some pretty nebulous things such as client knowledge and understanding. Think about how these alone are affecting investment markets – they are in effect a systemic shift from fixed interest to equities which is not an insignificant fuel for the markets. Now fast forward and the great DB transfer race starts to slow down. Markets fall, possibly by 30% or more as funds dry up, Brexit bites and a black swan is seen flying over North Korea. Less sophisticated, mass market clients see funds and income fall and are understandably upset and cry foul. If they had properly understood the implications of a transfer when the idea was ‘sold’ to them then they would have stayed where they were. Regulators and politicians are under pressure to act and have a choice. Tell the mass market they have only themselves to blame – hardly consumer centric or good for votes. Or look for a scapegoat that can shoulder the blame, preferably avoid any direct costs and even appear like champions to boot. Sound familiar?

      Of course, there will never be a shortage of people to tell you that this time it will be different…

    • I agree. There is plenty of guidance. If there is any doubt, advisers and compliance officers need to attend the FCA’s Positive Compliance workshops.

      I would say however that potentially more of a problem are those advising aginst DB transfers when they are not qualified to do so.

    • Harry Bersaille 18th May 2017 at 4:12 pm

      Rory, please can you explain what value, if any, the critical yield has in the world of pension freedoms? The list of criticisms of the critical yield grows longer everyday and clients recognise it for the regulatory nonsense it is, why do we have to provide it? It is confusing at best and misleading at worst.

  2. Get ready to write the cheques out to the FSCS. its going to end in tears.

  3. Context and perspective are all.

    The suitability of the advice is all about the individual needs. And so for some individuals a DB transfer will be the right move.

    Contingent charging is an issue for many firms, but maybe not all as highlighted by Jonathan.

    It seems to me there is a high correlation between what you were doing in the mid to late 19990s and your perspective on this issue.

    If you were not involved in pensions, or were just on the periphery (in a life co sales role for example) then you are more likely to be “filling your boots” or using DB transfers a “rocket fuel” for your business.

    If however you saw the good businesses ruined, retirements destroyed by the pension transfer review and the resulting PI insurance drought of the early 2000s and crippling FSCS levies (not to mention the harm done to clients and the resulting extra damage done to the profession), then you will be looking at this issue with mounting alarm.

    Many of us have seen this before and it doesn’t end well.

    • I agree with this analysis entirely. Back in the 90’s, once the smelly stuff had hit the fan, many cases of good advice were swept up in the review and judged on a prevailing assumption that if the client was worse off at that point in time the advice must have been wrong. If you haven’t been through it I can understand why it could look like a fuss about not much now. It isn’t. Add in a political climate and regulator that is even more consumer centric than back then and you have a potentially explosive situation building up.

  4. I’m not so sure that further “guidance” from the FCA is needed, either, as it seems to me that the regulator has been very clear as far as its expectations are concerned; they seem common sense to me.

    However, there is clearly a difficulty for advisers in that some people with preserved benefits see the CETV as a “cash fund” that is burning a hole in their pocket, regardless of the perils in proceeding. I’m reminded of those old Readers Digest scratch card thingies that used to fall out of the newspapers. If you won (and I wonder if anyone did) you could either have, say, £100,000 now or £15,000 for life, or whatever. Anecdotally, the majority of prizewinners chose the cash up-front whereas in reality, the annuity-like income stream was likely the far better choice for the overwhelming majority of winners (unless they were very old or unwell).

    There are circumstances where “subjectivities” over-rule the objective number-crunching we are obliged to do. Health is an obvious example. If you were in serious ill-health, would you really buy an annuity, unless for dependant’s protection? Would you prefer the flexi-access drawdown options – I think the majority would take FAD over an annuity most of the time.

    We know, though, that those who take a CETV into a “private” arrangement because of ill-health might get caught by HMRC if they were to die in the first two years because they have deliberately deprived their estate of cash, thus IHT. I’m not a medical expert, of course, but I do think that there is a strong argument for having an individual with a CETV “issue” apply for a two year term policy in order to have a fully underwritten “snapshot” of their physical health prior to proceeding with any investigation of their transfer options. Others have mentioned keeping the DB benefit and allocating money to a whole life policy as an option; I think this is intriguing and have yet to meet anyone who will stump up the hefty monthly premiums for a guaranteed whole life policy (“it’s the kids inheritance”) and keep their DB pension – they demur because of cost and mutter about “they can have what’s left in my pension fund when I’m gone”.

    There is a lot of “wooly” thought processes involved in the whole DB transfer arena; trouble is, just like the stock market, positive responses to FAD options can go down as well as up when things don’t work out as expected (which they rarely will).

    This is oftentimes the most complex issue that individuals with deferred DB pensions will have ever had to deal with and we are all aware of the delays in getting TVA reports done (I outsource), inconsistent data provision from Schemes, and the incredibly difficult series of assumptions involved. Trying to explain that a £750,000 CETV merely represents “fair value” can be rather an uphill task!

  5. I think we have two temporary issues coinciding here; Government tax grab policy and regulatory concerns.

    TV’s are currently at all time highs, sometimes 60 x the initial pension. So ignoring the long term benefits of guaranteed income, why would Jim in the street not be tempted by a TV of say £250,000 or more? They’ll almost certainly never see a number like this again.

    I worry that politicians and regulators just take a short term view, look at the financial crisis as an example.

  6. We have looked at DB transfer processes for one of our clients and the experience outlined by the customer in this article is common across the market. The customer experience is unnecessarily dreadful. There is a big opportunity to put in place a service that does it well, handholding the customer such that they really can reach the right conclusion. There is a double standard in the industry – it is now widely regarded as poor value to recommend an annuity in all but exceptional situations. Annuity yields are generally between 4% and 5% (assume age 60), implying a multiple of between 20 and 25 (ie, the number of years to ‘earn’ your capital back). DB transfer multiples at current gilt yields can be as high as 40-50 x the promised pension, and yet the starting point for advice is that the guaranteed income is a precious thing that should not be given up lightly…….Whilst I recognise there is not a straight line comparison between these 2 scenarios, it does feel like the industry is unable to see the proverbial wood for the trees and a lot of customers may be missing out on the chance to plan a better retirement

  7. With transfer values, occasionally, up towards 60 times the initial pension I would have considered a transfer for my wife’s pension. Unfortunately NHS scheme members cannot access this option. Maybe, now, people who keep referring to schemes like hers as ‘Gold Plated’ (people who read the daily mail, express or telegraph for their ‘news’) will stop doing so.
    It’s amazing how easily some people can get brainwashed by populist rhetoric.

    By the way, if anyone knows of a wizard wheeze around this problem I am open to enlightenment.

  8. Terry Mullender 18th May 2017 at 12:12 pm

    I agree with the first comment made by Rory Percival.

    The critical yield growth rate is relevant, but less relevant, as client’s are looking to transfer for a whole host of reasons the least being to try to match their estimated DB scheme income and tax free cash by purchasing a conventional annuity.

    Inevitably more DB schemes will pass into the PPF and I believe that the legislation concerning the revaluation and escalation of deferred pension benefits has to change, (reduce) to reflect the times in which we live.

    As a professional adviser you have to look at each case on it’s own merits. Sometimes your advice will be to transfer, sometimes it will be that the client should remain in their DB scheme.

    Finally, I would add that to assume that remaining in the DB scheme is by default going to be the “best” thing for the client is inherently dangerous. If you are not involved with DB transfers you have to recommend that the client speaks to an adviser that is, and document this on your client file.

    • “Finally, I would add that to assume that remaining in the DB scheme is by default going to be the “best” thing for the client is inherently dangerous.”

      And yet COBS 19.1.16G requires you to do exactly this if you are advising on it. This places a heavy burden on the adviser to be able to justify any transfer advice – I would suggest it’s equivalent to being able to do so ‘beyond a reasonable doubt’. As opposed to the suitability of other advice which is generally assessed ‘on the balance of probability’.

      DB transfer advice has it’s own rules in COBS. Rightly or wrongly, that alone sets it apart from other advice. To think that the FCA or politicians will forego its use as a tool, or ignore it, in the event of a crisis or threat to either of them is both naïve and ignoring history.

    • Terry

      “If you are not involved with DB transfers you have to recommend that the client speaks to an adviser that is, and document this on your client file”

      “Have to” Really??

      Please point out the specific rule or guidance reference in COBS or any other FCA published document that states this?

  9. I keep saying this, if DB schemes caught up with the 21st century and thought about becoming a bit more flexible and applicable to their clients circumstances, then there would be no need to transfer the funds. Inability to vary income, alter the lump sum in lieu of income, better death benefits for children, flexibility in the event of ill health, be able to use tax advantages. If these issues were addressed then transfers would reduce overnight.
    One other thing, I think many DB schemes are happy to see funds being transferred out currently. It reduces their liabilities moving forward. Maybe the two issues go hand in hand.

  10. Yes DB Schemes Exec Pension Schemes and other Occ Pension scheme arrangements have been messed around so much and effectively destroyed or asset stripped by the current Government and the previous Governments – through ignorance and lack of Statutory Duty of Care. Trust in Pensions has been replaced – as it has in Banks by cynical swindling management using their low level employees for information gathering and pestering clients with their absurd products. The FCA has sat by and watched as they are the Agent of the Government – to create concern and anxiety for all engineered to produce new found ways of Taxing the public indirectly for the Government coffers – all of which is passed on from financial institutions like banks and Insurance companies – through their agents Tied Restricted and Independent ( influenced by their sponsors – such as Andy Murray and Standard Life. The bias of sponsorship and the Pricipals requirement creates undue influence – and biased direction. To compare NHS Trusts – who have been paying out obscene amounts of tax payers cash under Jeremy Hunt MP – whilst Doctors and GP’s are now terminating their services, quite rightly passing it down to the lower levels of the NHS Pyramid as the Asset Strippers in the CONservative party continue to sell of UK assets – Doctors Police Prison Wardens have the opportunity to place your point on June the 8TH. It is true we do need a leader – not in May but in June, – June the 8th

  11. Legislation enables transfers to Stakeholder pensions who cannot refuse to take the transfer. Maybe clients should insist on transferring execution to Stakeholder then take it from there.

  12. Anthony Smith

    Re stakeholder. Not striclty speaking true. Need to dig deeper on that reference to the two pieces of primary legislation used to create the stakeholder framework. In addition, the ceding scheme needs an adviser to stamp the discharge papers to say advice has been given (no need to disclose what that was) for any cases over 30k. This angle is dead.

  13. Re the whole COBS 19.1.16G thing….
    A Rugby ref can go “upstairs” and ask either “Try or no try” or “Any reason why I cant award a try”.
    And you may then get a different outcome depending on which question is asked.
    By creating a starting point favouring one course of action, you are at least to some extent dictating the outcome.
    “Pure” advice should be unbiased in all respects and should provide the solution that most accurately matches the clients objectives and circumstances. If done in good faith then its really not that complex a principle. But it totally depends on starting from a totally unbiased place.

  14. Bhavikkumar V Shah 20th May 2017 at 10:54 am

    If i was transferring my own final salary pension, I think I would find a TVAS report useful. The critical yield would be a useful starting point to determine whether the transfer value represented good value. A modern TVAS report also shows a good comparison of death benefits. I would use cash flow modelling to see how long the pot would last based on fund value, anticipated withdrawals and appropriate growth rate; this should be reviewed regularly.

    The disadvantage of pensions freedom is that some people may squander their savings. But for many the flexibility is a boon allowing them to secure better death benefits, larger lump sums, better tax planning etc.

    I do not think the FCA needs to take any further action regarding TVAS in light of pension freedoms.

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