Whenever I speak to advisers, it does not take long for the conversation to turn to defined benefit transfers.
On the one hand, there is considerable excitement at the business opportunity such transfers represent othd a genuine feeling that, for some, it is absolutely the right thing to do. But there is also an underlying nervousness about the regulatory regime and whether it is fit for purpose.
So, what do we know about the state of the market? And how do the rules around advising on transfers need to be changed?
A survey of advisers we undertook last month shows a clear picture of a strong and growing market with large numbers of high value transfers. The vast majority of respondents reported increasing volumes, with an average 60 per cent more enquiries compared with a year earlier.
Typical cash equivalent transfer values lay in the range of £250,000 to £500,000, which usually represented between 25 and 30 times the annual pension given up.
The three biggest reasons given by clients choosing to transfer following advice were greater flexibility, the size of transfer values on offer and the more favourable treatment of benefits following death.
Where advisers were faced with insistent clients wanting to proceed against advice, around four-fifths said they declined to handle such business but one in five was willing to do so.
1. Outdated regulation
The issue of insistent clients is just a subset of wider concern over the way in which transfer business is regulated and about potential future regulatory action.
One obvious problem with the way in which transfers have to be assessed is that the rules were written before the introduction of pension freedoms in April 2015.
Assessing a transfer by looking at what annuity could be bought with the invested funds if they were transferred out may have made sense in the past, but with many people transferring precisely because they want a more flexible outcome, this seems the wrong benchmark.
While critical yields are a relevant factor in assessing a transfer, the current rules seem to put too much emphasis on this rather narrow way of looking at things.
2. Independence of TVAS services
Concerns have also been expressed about the independence of the transfer value analysis evaluation services being offered by some providers.
It is important advisers do not feel beholden in any way to the company which provided the TVAS when it comes to deciding where transferred funds should go, and many people feel the best way to ensure this is to use TVAS services with no link to a provider. Reports that some providers expect advisers to pass funds to them in return for “free” TVAS services will have raised eyebrows with regulators.
3. Partial transfers
There are other aspects of the DB to DC transfer process which could be improved in order to provide better outcomes for clients and reduce costs and risks for advisers.
One would be a legal right to a partial transfer of DB rights. This is particularly relevant where someone has long service with a particular employer and therefore has most, or all, their DB rights in a single scheme.
As things stand, many people face an all-or-nothing choice about whether to transfer all their rights or leave them all in the DB scheme. The right answer for many might be to retain some of their DB rights and transfer out the rest. But many occupational schemes are not willing to facilitate partial transfers. If they did so, this could de-risk the process both for the client and for the adviser, and could result in better outcomes all round.
4. Quality of CETV quotes
Another frequent complaint from advisers is the quality of information provided by schemes alongside CETV quotes. Our survey found advisers routinely received insufficient information from schemes to make a proper assessment and had to go back with follow-up questions.
As a result, the majority of advisers said they sometimes found themselves in a situation where CETV quotes lapsed and a new one had to be obtained.
Schemes should be required to provide pro forma information alongside the CETV quote that would offer all of the information likely to be needed to carry out a proper evaluation. This would reduce the amount of “double-handling” for schemes and would produce a much more streamlined advice process.
Given the huge importance of this large and growing market, it is vital we get the regulatory framework right in the interest of clients and advisers alike.
Steve Webb is director of policy at Royal London