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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

Trott

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 that DB transfers are a dangerous thing to recommend.

Many advisers start with the premise that it is a bad thing to do and then have to convince themselves it could be in the client’s best interest. But there is also a concern that stopping a client from transferring could result in a complaint from the member or their family further down the line. After all, pension benefits do not just impact the scheme member these days; it could also affect generations to come.

Death benefits

The biggest issue surrounds the death benefits available in a defined contribution scheme versus those in a DB scheme. This used to only really be an issue where the member was single and nothing would be payable on their death. But it was quite simple to deal with, as it was an all or nothing option and the client could easily understand the implications of not doing the transfer.

Things became a little more complicated when pension freedoms were introduced.

Take the example of if the beneficiary did not need a regular income or would prefer a lump sum. This may still be a reason to transfer because, although a pension would be payable on the death of the member, more flexible benefits might be available. In addition, the benefits in the DC scheme may not be taxable on death if the death occurs before age 75.

Involving all those that may be impacted might not be feasible but it is wise to ensure those closest to the member are made aware of any decision made so that everyone is on the same page.

This would be particularly relevant if the member has any health issues where inheritance tax might be a consideration. Care also needs to be taken when dealing with vulnerable clients or clients at times of stress.

Underfunded schemes

Meanwhile, many DB schemes are underfunded with payment plans in place. This sort of information is relatively easy to come by but knowing if the employer is likely to be able to make these payments in the long term is more difficult.

Should the scheme end up in the Pension Protection Fund the comparison of benefits will not have been accurate. There is little that can be done about this with the exception of making the client aware of a worst case scenario. If this issue is ignored or the client does not understand then there is another case for complaint in the long run.

Execution only and insistent clients

Before pension freedoms came along, a member could opt to transfer without advice should they want to and many pension providers would accept the transfer. Now, though, advice is required in most cases and making a recommendation to remain in the DB scheme will really limit the member’s options should they want to proceed anyway.

This could easily be a contentious issue with the client: the ceding scheme that requires advice to be taken is not concerned what that advice is but a receiving scheme will want to protect itself and will often insist the advice to transfer is positive. This could put pressure on the adviser to change their advice, even though it is felt it is not in the client’s best interests.

There is no right or wrong answer to the transfer question in all cases. For some, there will be a fine line between a positive recommendation to transfer and a recommendation to stay in the DB scheme. Understanding and documentation are key to ensure that all parties are aware of the implications and protected in the long run.

The varied retirement and death benefit options available make decisions even more complex on a purely factual basis, without even dealing with the soft facts that are just as important. The view that advising someone to remain in a DB scheme is safer than advising a transfer may not hold true in this day and age.

Claire Trott is head of pensions strategy at Technical Connection

She will be joining us at Money Marketing Interactive as a speaker on May 18th.

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. “Many advisers start with the premise that it is a bad thing to do and then have to convince themselves it could be in the client’s best interest.” Not quite what the FCA say but in effect that is what they imply.

    • COBS 19.1.G states:

      “When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme or other scheme with safeguarded benefits whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable.”

  2. “Many advisers start with the premise that it is a bad thing to do and then have to convince themselves it could be in the client’s best interest.”

    This should be all advisers as it is an FCA requirement under COBS 19.1.6G Suitability

    When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme or other scheme with safeguarded benefits whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable. A firm should only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client’s best interests.

    “Should the scheme end up in the Pension Protection Fund the comparison of benefits will not have been accurate. There is little that can be done about this with the exception of making the client aware of a worst case scenario.”

    TVAS reports take this into account and compare the benefits that would be provided under the PPF.

    “This could easily be a contentious issue with the client: the ceding scheme that requires advice to be taken is not concerned what that advice is but a receiving scheme will want to protect itself and will often insist the advice to transfer is positive. This could put pressure on the adviser to change their advice, even though it is felt it is not in the client’s best interests.”

    The legislation states the client has to receive advice, it makes no mention to having receivced a recomendation to transfer. The advice liability rests with the adviser and what the advice is, is of no concern to the receiving scheme.

  3. “The common stance is still that DB transfers are a dangerous thing to recommend.”

    The starting point is that it’s a dangerous thing to advise on, period. If you do advise then it’s probably more dangerous to recommend a transfer than not given the FCA guidance specifically states the starting assumption must be that it is not suitable.

    Each adviser/firm simply has to consider the risks to their business and make the decision whether to get involved before discussing suitability. Getting involved and suitability are two separate things.

  4. For the best results for a cuppa with your client

    See FCA Cobs 2.4.T

    You see they (the FCA) have an answer for everything the rule book is what ? as tall as Big Ben

  5. The issue of other family members complaining after death would have no support in law, the member was free to find someone who would say yes, and we all have a legal right to decline to act if we do not want to.

    • Nigel Tyrrell 11th May 2017 at 4:10 pm

      I am not so sure – if the member approached an adviser because they wished to transfer the scheme with one of the main drivers death benefits for the next generation and they were advised not to proceed by a suitably qualified adviser – then they drop down dead within say 10 to 15 years than I think the next generation would have a claim.
      You most certainly have a right not to advise, however, as soon as you step over the line by providing guidance which could be seem as advice e.g. saying the FCA approach is that a Defined benefit scheme is normally the best place then you may have a problem.
      Thankfully I am not authorised to provide DB transfer advice and even if I did have the qualification do advise I would not seek the permissions to advise.
      DB advice presently is a Rock and a Hard Place.
      Fortunately in the very small number of cases we come across I know an excellent adviser who is prepared to assist.

  6. Receiving schemes are in the main anti insistent customers given FCA vesting suitability on them in that scenario

  7. “Defined Benefits” two words which are at odds with each ( a contradiction of terms) other especially in the field of pensions where suitability is not checked at commencement – and income /annuity is not checked at all. Put simply Client outcomes do not figure in the sale of these products. With so many companies insurance, banks and others whose trade relies on “consolidation” or the churning of products – along with the insolvency of Final Salary schemes such as Equitable Life, Scottish Widows ( still trading) and others – it is understandable why consumers are concerned of the unsuitability of the unsustainability of pension schemes – and the destruction of their Long Term Savings by Tax Reclaims by the CONservatie Government – through “pension freedoms “. The only freedom is the Tax Reclaim by a tardy incompetent Government – who value Vanity Projects and have overturned decades of legislation in Pensions and Savings – to the British People – to incentivize their own long term savings – which in turn was invested in the UK, with UK companies and some abroad. Now with the World of opportunities the sponsors of the UK Government Black Rock Fidelity Wells Fargo and Metro Bank etc., ( The American Invasion continues uncontrolled unchallenged ). Mr Obama was correcet when he said UK will Be at the Back of the Queue – behind the Americans who if they cannot purchase it they shoot it ( ask those in the southern states ?) . Pensions in the UK once the backbone of savings have been released, regurgitated and ripped off . Why would anyone wish to save in any investment vehicle ? Unsafe, Unsound, Unsuitable and Uncontrolled by the manipulators !

  8. Suitable to transfer or not? Well, the adviser will not know for years to come when the client goes to the FOS fully armed with retrospection and takes of woe no matter what.

  9. We all have our own opinions on DB transfers and it really is dependant on the client’s circumstances and objectives. I do think we are missing the point somewhat in that this is a first class article on the subject of a quality we all should expect from Technical Connection. Thanks Claire

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