The Government’s decision to mandate regulated financial advice before savers transfer out of defined benefit pension schemes initially looks like an easy win for advisers.
After an industry consultation, Chancellor George Osborne has extended the new pension freedoms to savers in DB schemes, with the caveat that savers must get advice before moving to a defined contribution scheme.
But although this creates an advice opportunity, aspects of mandated advice are cause for concern.
These include the negative implications of forcing people down the advice route, issues with smaller pots and whether there are enough advisers to serve the growing number of people who will be seeking advice.
The Government considered an outright ban on transfers from DB to DC schemes but in the end decided against this, instead choosing to ban only transfers out of unfunded public sector DB schemes.
Towers Watson senior consultant Stephen Green says it is a logical move to mandate advice for DB transfers.
He says: “Transfers are a cheaper way of getting pension liabilities off a company’s balance sheet than paying an insurer to take responsibility for the pension payments.
“The Government sees compulsory financial advice as the first line of defence against any hint of misselling when people transfer out of DB schemes. It will take a keen interest in this advice and the FCA has already signalled that some advisers need to raise their game in this area.
“I would expect interest in transfers to increase but it is a case of wait and see how the scale increases.”
Retirement advice specialist LEBC envisages a big opportunity on the back of the Budget.
It is working with 20 firms to advise members of DB schemes on transfers and says it has another 10 in the pipeline.
LEBC longevity director Nick Flynn says: “There will be an increase in the number of individuals looking to access the freedoms. We may be talking about modest funds but it is a huge opportunity for those people.
“Why have a joint-life final salary when you’re single? The same goes for health concerns, where there are other avenues worth exploring.”
The Treasury says although people will be required to take advice, individuals can choose not to follow it.
Flynn says some people will be forced to take advice to fulfil Government demands.
He says: “At the smaller end of the market where people want to commute to get cash and the adviser thinks it is unsuitable, there is a problem.
“They will be paying for advice which they don’t want and which doesn’t give them what they ask for. Some people will turn around and say ‘I know best.’”
Mercer retirement leader Deborah Cooper says: “A significant proportion of people who take part in enhanced transfer value exercises are what the FCA deems ‘persistent customers’, where even though the adviser has said ‘No’ they go ahead and do it anyway.
“There are people for whom having the flexibility and cash is clearly more important than the DB scheme benefits.”
She adds for some people, mandated advice will represent a significant burden.
She says: “People moving from DB schemes will be expected to take advice. That itself will be a bit of an obstacle because people will have to pay for the advice and this may act as a deterrent.”
There are concerns some individuals seeking advice will struggle to access it in a cost-effective way.
While firms such as LEBC have arrangements in place to advise en masse when employers promote a transfer option, those seeking a member-prompted transfer to access their savings with total freedom will need to find and pay for their own adviser.
The trivial commutation threshold was lifted in March to £30,000 and the lump sum option extended to those aged over 55, down from its previous minimum age limit of 60. These people will not be required to take advice. That will help some people although those with relatively small pots could still struggle to pay for advice.
Flynn says: “It is probably not that economical for the individual to pay for advice. We’re doing fairly significant volumes of cases.”
Cooper agrees that while some advisers are geared up to advise on a scaled-up basis, others will struggle to operate a successful model offering transfer advice.
She says: “A lot of pension scheme members don’t use advisers because it is not the pay bracket they are in so I wonder how that is going to work.
“Every individual member going out and finding their own adviser seems inefficient for both the adviser and the member. There must be a smarter way to do it because otherwise it could become a bit chaotic.”
Green agrees. He says: “There is a risk some people are put off because you need access to an adviser and it may depend what the capacity is like for that.
“Given the opportunity there is, one would hope advisers will be able to scale up their operation to offer advice in a more efficient way by seeing how the retirement market is growing and becoming an area they want to invest in.”
Unlevel playing field
The Treasury says it will consult on removing the requirement to transfer first to DC schemes for DB members who want flexible access to their pensions.
No timescale has been set for the consultation and the Treasury declined to give further details of how the proposals could operate.
Experts have raised concerns about how pension freedoms in a funded DB environment would work. Cooper believes employers running DB schemes could resist the plans. She says: “It is not overly difficult to pay cash to somebody but to retain their funds and give them flexibility would be quite a challenge for pure DB schemes.
“The nice thing about DC for employers is the employee leaves you at retirement and you don’t have to worry about the ongoing administration of their fund and communications. But if you were to provide ongoing services for DB schemes, that would be a big step for the trustees so there are various things which result in additional cost.”
In the event that total pension access within a DB fund is introduced, it is not clear if the same requirement to receive advice will apply.
Scottish Widows head of pensions market development Ian Naismith has questioned what would happen in that kind of unlevel playing field.
He says: “It would seem a bit silly if savers are required to take advice to transfer from a DB to a DC but don’t have to take advice to access pension freedoms from within DB.”
Despite the complications, with mandated advice when it comes to DB transfers, savers will be afforded all the usual regulatory protections of full advice. Whether this will be a positive for advisers is still unclear.
Greg Heath, managing director, Deryshire Booth
This will create opportunities and increase awareness of the need for advice overall. For example, people often ask why you would transfer out of a DB scheme but an adviser can explain that in some cases, where the client is ill, for example, the transfer value is worth looking at. I can see some cases where the client may end up being advised at a loss for the adviser if the value is small. But there is a degree of goodwill there or the possibility the client may have other assets to advise on.
Tim Horrocks, managing partner, Rock Wealth
At the very least this will give individuals a reason to talk to an adviser, which is always good. My main concern with this type of business is what happens if a government or regulator further down the line decides they want to review all these transfers. It will be the case for many people that they are paying for a service where the adviser does not recommend a transfer but they go ahead and do it anyway.
What did the Government consider?
The Government’s Budget consultation, entitled Freedom and Choice in Pensions, asked for views on whether all DB-DC transfers should be banned completely or be subject to restrictions.
What did it decide?
The consultation outcome published last month permits DB-DC transfers but only under the proviso that individuals have taken advice from an FCA-authorised person who is independent of the ceding scheme.
Why are members of unfunded public sector schemes not allowed to transfer out?
The Government chose to do this due to fears that a high number of members transferring out could place strain on the public purse. If members were to exit schemes such as the one run for the police – which offers DB benefits paid from taxes, not from a pool of invested assets – the Government would have to find the cash to pay pensions upfront rather than defer pension benefits over the course of retirement.
Will DB members be able to access pension freedoms?
The Government has introduced a permissive statutory override to prompt DC providers to offer access to new pension freedoms which will be available from April. DB scheme members can access freedoms only by transferring out although the Government says it will consult on making the flexibilities available within a DB fund. It has not yet set out the terms or timeframe for the consultation.
People will like knowing they have choices but it is human nature to value what you have and not give it up lightly.
Typically, most people will not make up their minds until they are ready to retire and often the first step will be to seek a core level of secure income through retirement before embracing the new flexibilities.
Where members want to swap their guaranteed pension for a level of income and a pot of money that they can dip into as they wish, employers will not complain.
Transfers are a cheaper way of getting pension liabilities off a company’s balance sheet than paying an insurer to take responsibility for the pension payments.
We expect more schemes to allow members to transfer out right until the point of retirement. Guesses about how many people take up these options will then affect a large number of funding aspects for the ceding pension scheme.
The Government sees compulsory financial advice as the first line of defence against any hint of misselling when people transfer out of DB schemes. It will take a keen interest in this advice and the FCA has already signalled that some advisers need to raise their game in this area. Advisers providing a holistic service for retirement income planning will be best placed to do so.
In practice, advice on transfers is already broadly compulsory because pension providers will not usually accept transfers without it. The legislative requirement for advice will put pressure on advisers to find more efficient ways of delivering advice in order for the requirement not to become a barrier for members with smaller pots accessing the flexibilities if they wish to.
Stephen Green is senior consultant at Towers Watson