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Advisers are up against a DB transfer dilemma

Natalie Holt, journalist with Money Marketing Photo by Michael Walter/Troika

Ask any adviser about whether they deal with insistent clients, and more often than not you get a categorical “no”. Bodies such as the Personal Finance Society have made their stance clear, in that the future risk of liability is just too great.

The debate is loaded, but the picture is a more nuanced one than the commentary might suggest. Just because firms are saying no to insistent clients, does not mean they are saying no to final salary pension transfers. In fact, defined benefit to defined contribution transfer business is being written at a record rate, and when you factor in not just the transactions but the level of enquiries, it is clear demand for DB transfers is sky high.

Members of DB schemes have heard what pension freedoms have to offer, and they want a piece of it for themselves. The flexibility is a big pull factor here, but the enticing transfer values currently on offer are also holding sway.

Headlines about the poor pensions prospects for BHS and Tata Steel do not help to instill public confidence in the pensions system, and all of this fans the flames for demand to transfer out of DB schemes.

From speaking to advisers at our recent Money Marketing In Focus regional events, it is clear there are some very competent advisers recommending DB transfers, who are backed by a robust advice process.

But separately, advisers have also raised concerns about how the pension transfer market is working. Firms charging £40,000 to carry out a transfer for example, or charging only at the point of transfer.

There are two opposite problems facing the pension transfer market at the moment, strangely with both happening at the same time.

There are firms who will not touch DB transfers with a bargepole, even if suitable advice would be to transfer. At the other end of the spectrum, the demand for pension transfers is such that, if not done right, we risk building up problems for the future.

Increasingly, advisers are being urged to consider the rationale for carrying out transfers, rather than assuming a position of blanket rejection. As the critical yield figure becomes less relevant, advisers and providers want greater regulatory assurances on this complex area of the market.

Judging from the conversations I have had with advisers, the debate around DB transfers looks set to run and run.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. it is a very important area of advice for clients. whilst we don’t actively promote advice on DB transfers we are prepared to advise on the pros and cons of potential transfers. whilst pension freedoms may have been the catalyst for demand it is now the case that improved life expectancy massively falling long term gilt yields and lower assumed investment returns have all led to transfer values which could be potentially worth exchanging guaranteed income for. we look to charge for an analysis report regardless of transfer with additional costs being covered if the advice is to transfer. we make it clear at outset before the client engages us that we will not carry out a transfer if it is against our advice.

  2. Agreed Natalie. There is a market for providing a fee based service, whether or not the transfer goes ahead. Within my firm there must be a solid case for transfer presented to me, after factfinding and risk profiling, and the client will pay a fee for my report, whatever the outcome.

    In this way the adviser and the client bear the risk, not the Transfer Specialist who can arrive at the correct decision. Certainly Critical Yields are less relevant, the comparison model should be drawdown as that is usually the intended destination of the funds. Added to the overall wealth and investment experience/knowledge of the client it is possible to approve compliant and safe transfers.

  3. Tata Steel (who carry the liability of the British Steel Pension Scheme) are openly stating that they see the likely outcome as assets passing to the PPF.

    BSPS have also seemingly issued transfer packs to ALL MEMBERS of their scheme without the member requesting it. Many of these members will have significant CETVs and no doubt a large number will decide ‘they are better off taking control’ given the fears of the implications of falling into the PPF.

    The issue advisers have is that, financially, DB is likely to give better total income (perhaps an understatement) but how do you factor in all of the softer aspects without facing the wrath of FOS if things don’t work out.

    Rory Percival (I think…) said somewhere that if advisers do what is right for the client, they are on firm ground. The only issue advisers have is that we don’t have the benefit of hindsight when deciding what is going to be in the clients best interest. The FOS do.

  4. The problem to my mind is the lack of RULES and PROCESS. The regulator has sat on the fence waiting to see the outcome. 16 months ago the FCA stated that TVAS was not fit for purpose after pension freedoms and the high transfers values due to low gilt yields. Yet since them not a word, well not actually true, they did say they were happy with insistent clients as long as it is done correctly. At this point we have not heard another word. Well actually again not true, the FOS, PFS and PI companies also have said they do not like insistent client transactions. So, that’s made every thing crystal clear.

    The future is easy to see, client when faced with losses, no income will have selective memory loss and seek to claim. Those advisers who have not completed a very robust process, documented every point fully, will be at risk. These cases will eventually result in a full review and redress, on the lines of PPI of this I have no doubt.

    So, insistent clients are going against advice and therefore I agree with the PFS we should not transact. However, a recent case has challenged this stance. The TVAS shows a 20% returned needed over the next 4 years to NRD to match benefits. The client does not care, has sufficient investments (which he manages) that the pension fund is not required at all. He has pointed out that if we fail to transact and in 4 years time he is worse off as gilt yields have increased, or scheme fails, he would hold us accountable as our advise is to remain (advice he has paid for). If we do move him and the transfer value increase we also can be held liable. In other words, we are potentially liable if we do or if we do not. This is the environment advisers face every day, why, because the regulator is failing both the consumer and the adviser, preferring to remain in the back ground, only acting when they know the outcome.

    There is an urgent requirement that the FCA and the FOS provide explicate guidance and process, with regulatory statements and requirements for this very high risk area of advice.

  5. The words insistent client keep coming up here. Why? The FCA do not recognise the term and to their credit they have given very clear guidance as to what to do when a client wishes to proceed against your advice. The recent FCA Positive Complaince roadshows have reinforced this guidance and my understanding of what they say is reasonable although there is one thing missing from their slide which I believe an adviser should do – include a 14 day cooling off period before transacting the case. A FOS requirement I read somewhere? If you do the job carefully and in a detailed way, clearly identifying the risks and possible downsides, stating that the client is proceeding against your recommendations, then apart from a cynicism relating to FOS adjudications, you have done your part.

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