Millions of savers could be blocked from Chancellor George Osborne’s pensions revolution because providers fear regulatory sanctions if they accept “insistent” transfers from defined benefit schemes.
The Chancellor has said he wants “as many people as possible to be able to access their pension flexibly”, including those from DB schemes who might want to take advantage of the array of new options available to members of
defined contribution schemes.
Treasury documents reveal it expects around 18 million DB and DC scheme members will be able to draw on their pension flexibly from April.
But pension providers’ unease at the advice provided around DB to DC transfers could mean members find their access to the flexibilities impeded.
Some providers, such as Aviva, will not accept any DB transfers, whether they are individual requests or employer-led enhanced transfer value exercises, where multiple members of a DB scheme are offered a deal to leave the scheme, cutting the employer’s liabilities but often leaving members with less valuable benefits.
Fidelity Worldwide Investment and Sipp provider James Hay will only accept transfers as long as there has been a positive recommendation from an adviser first. To counter the risk of members losing out – and to stop millions of pounds leaving DB funds and potentially hitting UK investments – the Government has said individualsmust take advice from a regulated adviser before transferring to a DC scheme.
But advisers warn clients should only transfer out of DB schemes in special circumstances, such as poor health but without a spouse, or to settle debts.
They also warn under DC investment and longevity risk is shouldered by the member.
Advisers are therefore unlikely to endorse a move, meaning if members are determined to transfer out of a scheme, they will have to go against the recommendation.
However, if providers only accept transfers following positive recommendations, these “insistent customers” may find their route to the pensions freedoms blocked.
And demand for transfers looks almost certain to rise. According to research from consultancy Towers Watson, published this week, some 9 per cent of employees approaching retirement are interested in exchanging most or
all of their DB pension for a DC pot. A further 11 per cent would consider transferring half their DB savings.
Towers Watson senior consultant Will Aitken says the freedoms announced in the Budget have changed attitudes to DC pensions overnight.
“Prior to the Budget, hardly anyone was interested in exchanging their final salary pension, which was often deemed to be more generous and more secure, for a forced annuity defined contribution arrangement.
“Transfers can only grow in popularity from their current – virtually non-existent – levels, especially now that less tax will be due when unused DC pensions are passed down the generations.”
There are also fears that murky adv-ice processes around transfers still exist, meaning providers might unwittingly accept transfers that are unsuitable.
Fidelity Worldwide Investment retirement director Alan Higham warns some advisers might be happy to give a tacit recommendation to transfer which include caveats to cover their backs.
“If a customer says they fully und-erstand that it might not work out but they want it, and they’re prepared to sign any piece of paper put in front of them to say they’ve understood it, the adviser might then write a letter saying the client wants to proceed with the transfer,” he explains.
“They will say they’ve advised the client that it’s not in their best interests but there are reasons they want to go ahead, that they’ve fully understood the risks they are taking and they want to proceed with the transfer.”
Higham worries poor practices that dogged the transfer market in the past might resurface.
He says: “I hope the FCA is going to be sufficiently vigilant in this area, that it monitors firms giving advice and makes sure there aren’t a handful of advisers who go a bit native and are too eager to please customers. That was the problem in
Standard Life head of pensions strategy Jamie Jenkins says the provider has not accepted enhanced transfer values for several years because the relatively low margins did not outweigh the risk of falling foul of compliance. However, the insurer does accept individual transfers driven by advisers and Jenkins says despite regulatory guidelines there is a danger providers and advisers “don’t check each other’s processes”.
He says: “The question is where does the line get drawn? Because you could have a bad provider and a good adviser or vice versa, with the same net result that the exercise is purely executed.
“How far does each of those parties check the other’s processes? If a provider says we’ll do these transfers but on the basis that we’ll carefully check advisers’ advice process then in checking it you’re endorsing it. You could become to some extent liable for the advice.”
Currently, providers are unlikely to dig into the advice process that led to a transfer request. Aegon regulatory strategy manager Kate Smith says: “We would only deal with a regulated adviser and we wouldn’t know if the customer was an advised ‘insistent’ customer.
“We wouldn’t see the advice. We would only get the cheque and proposal from the regulated adviser, not the member.” l
David Gibson, director, Gibson Financial Planning
If you’re in a DB scheme, that’s something you should never let go of unless there are very good reasons. Over the longer term they’re going to lose out on all the value benefits of a DB scheme that most people would give their right arm for. I’m sure there will be companies that actively encourage transferring but unless there was a very good reason, it’s not something we’d want to do. You’re setting yourself up for some kind of mis-selling claim further down the line.
Jeremy Edwards is corporate director and IFA at Bankfield Financial Advisers
I’d probably run away screaming from these transfers. The level of risk for the adviser is out of all proportion to the amount of money I’m likely to earn from it. Personally I’d be very wary. The reaction when a client feels they are losing out from a transfer and goes to the Ombudsman, the experience at the moment appears to be that the adviser loses.
FCA finds poor advice in third of ETV exercises
The regulator found unsuitable advice had been given in a third of the 300 cases of bulk pension transfers it investigated as part of a review published this summer. Some of the practices that led to poor advice uncovered by the FCA included: generic templates that did not tailor to individuals’ circumstances; inadequate member risk appetite analysis; lack of consideration for tax implications of a transfer; and the use of default receiving schemes with uncompetitive charging structures. The FCA followed up the report by approaching individual firms and asking them to offer members redress where bad practice has taken place. The regulator also warned of the “temporarily heightened risk” of unsuitable transfers in the months before a mandated advice step is introduced for all DB to DC transfers.