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Kim North: The risks of advising against DB transfers

Kim North

Never before has the need for clarity in investments been as important than it is these days. A huge wall of money is being transferred from defined benefit pension schemes looking for place to be invested in drawdown investments.

With the FCA removing the guidance that a DB transfer is unsuitable, but needs to be in the client’s best interests, the floodgates have been opened for advisers to advise on transfers. Nigel Chambers of financial services software firm CTC believes that around 50 per cent of DB pension members would benefit from a transfer as they will not live to the average expectation of life.

Opportunities abound

Unless you do not read the press, you will know the many factors taken into consideration when advising a transfer from DB pensions to DC drawdown. We have become bogged down by critical yield and sky-high cash equivalent transfer value calculations. These high numbers are a once-in-a-generation opportunity to boost the value of the transfer. What we know is that as interest rates and gilt yields rise the transfer values will drop.

The biggest consideration for DB transferring clients is risk based on the variability of investment. Those not receiving advice tend to trust the banks and cash Isas so billions of pounds are invested in where consumers are effectively losing purchasing power year on year.

In the FCA’s asset management market study, the regulator found price competition is weak in many areas; evidence of sustained high profits over many years. It also found investors are not always clear what the objectives of funds are and fund performance is not always reported against an appropriate benchmark. Good work by the FCA and good luck to the fund providers that need to capture all their costs and fees for the first time – not an easy task.

Making sense of illustrations

To bring the ceding DB transfers and the receiving investment together perfectly, we need fund providers to illustrate returns on the same basis for similar asset classes. The FCA does not currently stipulate the assumptions to be used.

On, say a UK Growth fund from one fund provider to another, the illustrated mid-rate can vary currently from 4 to 5 per cent, or higher. As the DB scheme critical yield needs to match the receiving drawdown fund’s projected growth rate, the funds with the highest growth rate used will look more attractive. This will cause a bias to use the higher projected funds in drawdown.

Professional indemnity cover and misselling implications on DB transfer advice, plus the examination rigors, result in many advisers not advising that a client should take a DB transfer. I predict that where clients have been in meetings with advisers with, say, £250,000 as a CETV but are turned away as insistent clients, if they return in two years and the CETV has dropped to £180,000 they may seek redress for the loss.

The Financial Ombudsman Service has seen a limited number of DB transfer complaints since pension freedoms but wait until rates start rising. The FOS will be inundated with complaints about advisers advising not to transfer. You have been warned.

Kim North is managing director at Technology & Technical


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. One would hope that the regulator will tell the clients that the benefits will have remained the same, regardless of the transfer value.

    If the advice was right at the time, then it will remain right. (providing circumstances had not changed)

    In addition, I would argue that if the client is concerned about the underlying fluctuations of the transfer value, imagine what they would be like if the had transferred and the portfolio lost 20%?

    I worry more about complaints from children who could stand to benefit from a transfer if the client died.

    We have been telling advisers to have all interested parties sign the advice declaration for this very reason.

    • On what legal basis would you ask ‘interested parties’ to sign the advice and what happens if they don’t agree?

      The advice is to the client, if it’s good advice then you’re OK regardless of whether third parties benefit or not.

      You don’t ask others to agree to a will for the simple reason it’s an expectation not a right. Why is this different?

      Getting others to sign presents more problems in my opinion – involving others in the affairs of your client and potentially putting pressure on the client to benefit those interested parties just for starters.

  2. Yet again another non authorised idiot talking about matters they have absolutely no idea about.

    If an assessment is made today, and the most suitable advice is to remain in a DB scheme, on what basis Kim, do you believe a client can come back and win a complaint just becuase the transfer value drops in value.

    You have written this trashy article so please respond with evidence to support your assertions.

  3. A question for you Kim: Lets say a DB scheme is to provide £30k pa (forget about indexation) per year at retirement and the CETV today is £850,000. Can you please tell me what is the basis for any complaint in say 5 years where the pension income is £30K pa. The recipient couldn’t give a toss that the TV happens to have dropped to £600,000. The TV has nothing to do with them. The TV is not a benefit of a DB scheme. The benefit is the guaranteed income. I really think you should think about the stuff you are going to write before airing it. It does make you look a tad foolish

  4. I stated last year that there is a danger of advising against transferring.
    This is simple, transfers values are the highest they have been, its the complete opposite to the 1990’s early 2000.
    No No. Mr/Mrs Client you must wait until you need to access the funds. Ten years later the value has fallen substantially due to high gilt rates, better annuity rates. Client states I TOLD you I did not want an annuity. HOW WILL THE FOS treat this?
    If we cannot get clear outcomes from the FCA & FOS you are damned if you do, damned if you don’t, ITS A COMPLETE MESS.

  5. Additional to previous comment.
    The issue is not if the transfer is correct, its when you transact it. To many advisers are just stating leave it with the DB arrangement until you need it. This is good advice if the transfer value is low, but not if it is high. Just stating leave it there can no longer be suggested unless full research has been completed. If they intend to transfer, are sure they will transfer, leaving the transfer until 10 years down the road could be your undoing. Others will argue I am wrong, but the FOS in ten years time may argue otherwise, would you bet your house on the outcome?

  6. If one adviser says no to a transfer, the market is large enough for a consumer to find one who will say yes, so I cannot see a complaint upheld because one adviser would not accept an insistent client, they have merely exercised their right not to take on the business risk. This would set a dangerous precedent if advisers can be sued for not taking on a client. As has been said, if the advice was clearly right at the time and documented then there should be protection for the adviser. If the potential client disagrees, they can find someone who will agree with them, for a nice fee no doubt.

  7. Justin I do not need to defend Kim she is well able to look after herself .All I will tell that Kim has the experience on her side and I would tend to heed her comments.

  8. headbelowthe parapet 6th July 2017 at 4:56 pm

    Advise the client. If their goals and needs show that a transfer is favourable in their circumstances then advise them to transfer, if they do not advise them to retain the scheme. If they want to proceed against your best advice treat them as an insistent client – it’s their money and they have the right (enshrined in law) to be foolhardy. If your compliance system won’t allow you to do so you should change your compliance system, because it too is foolish…

  9. Duncan Carter 7th July 2017 at 5:47 am

    So someone has a deferred pension of say £10k p.a. at age 60 and at this moment in time the TV is £250K. In a years time the TV is either £150k or £350k. What has the client lost?

    The answer is a revalued pension of £10k p.a. and a transferring of risk if a transfer is taken. I’m not saying some transfers are unsuitable but many people struggle because their income needs are not secure.

    Stacking shelves in a supermarket is an option but at age 70, does one really want to do it?

  10. Terry Mullender 7th July 2017 at 6:58 am

    Firstly the FCA has not changed it’s stance on DB transfers being unsuitable for the majority it has made a proposal in CP17/16 to do so. Secondly I agree with the majority of comments that this article is misleading.

    To suggest that some clients may have a complaint upheld by the FOS because they were advised not to transfer, and their CETV has subsequently fallen, is illogical.

  11. simon cormack 7th July 2017 at 9:09 am

    I think that the author has a point.

    Advisers are certainly entitled to turn away clients if they think that the compliance risk is too great given the lack of any kind of safe harbour from the FCA.

    But the real question is over clients who are not turned away but who are given a personal recommendation to stay.

    In making that recommendation, did the advisor take into account things that it should not have (its own self interest in protecting itself from attack by the FO/FCA)?

    And if it did, can the client show (with hindsight) a loss? Of course the client could have gone elsewhere and obtained a postive recommendation, but presumably he would be entitled to rely on what he was told initially, and so would not think to go elsewhere.

    If we do ever move out of the current low yield environment, I can see claims companies getting quite interested in this area. The chances of success are probably low, but the amounts involved might make it seem worthwhile.

    I think advisers need to be quite careful about their decision making process in general (and how it is documented).

  12. Advice is a snapshot in time and anyone advising based on the fact ‘now is a good time’ is skating on thin ice… unless that advice is based on known future changes (i.e. legislation).

    Yes, CETVs are at a high, but that in itself doesn’t impact directly on whether a transfer is in the clients best interest though it of course feeds into the advice indicators (i.e. will the client outlive their pot!)

    Furthermore, CETVs may fall due to rising interest rates, but what if the market has, over the same time, fallen by 50%? Is the client better off? Who knows; as I say, thin ice.

  13. Sometimes people think you are an idiot and it is best to keep quiet, else you confirm it!

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