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Kim North: Transfer complexities scaring advisers away

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When not on the golf course, pension providers and investment houses have been putting the new freedoms under the microscope to work out how to benefit from what is estimated to be a trillion pound business opportunity.

When we add in the wall of money that will arise from members of defined benefit schemes transferring out to gain access to the flexibilities it certainly looks like a once in a lifetime opportunity.

However, most financial services companies are too afraid to promote the benefits of transferring out of DB to gain defined contribution flexibilities. For many existing DB scheme members the flexibility to keep money invested and simply take cash sums when needed is very attractive, particularly for modern elderly lifestyles. I believe providers and financial advisers should face up to gaining the qualifications and courage needed to make the facilitation of these DB transfers happen.

Early June saw the FCA attempt to regulate this technical area of pension transfers. Its policy statement on proposed changes to the rules introduced the term “safeguarded benefits” to include DB benefits and DC plans with embedded guarantees.

The regulator also proposed requiring a transfer value analysis for advice on all transfers of safeguarded benefits to flexible benefits, including advice on transfers from DB to occupational DC schemes, just as it requires for advice on transfers from DB to personal pension and stakeholder pension schemes.

Meanwhile, it wants to bring DB to DB transfers under its regulated activity wing too. With the exception of statutory schemes within the public sector transfer club, DB to DB transfers require two transfer analysis calculations with the added hurdle the new DB scheme trustees may refuse the incoming transfer or offer a low level of benefits. So who are the pension transfer specialists that understand this complex issue? According to Syndaxi’s Robert Reid only actuaries and a small number of advisers can deal with these transfers. This means a new area of regulated activity will see little action as the vast majority of financial advisers will not be able to touch it.

The transfer landscape as a whole becomes more complicated due to the fact there is now no limit on the amount that can be drawn down in any year. Previously, the flexible drawdown option was limited to individuals who could demonstrate a guaranteed income. Consumers must pay for regulated financial advice for pension transfers but the increased complexity raises the risk of unsuitable advice from non-specialist advisers, which the FCA will be all over like a rash. With it all just becoming more and more complicated, no wonder firms are backing away from offering advice on pension transfers.

As Arnold Palmer once said: “golf is deceptively simple and endlessly complicated”. The high level of pensions complications could have been avoided if freedoms applied to all types of schemes.

Kim North is managing director at Technology and Technical 

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Douglas Baillie 19th June 2015 at 12:57 pm

    There cannot be many circumstances when a member of a DB pension scheme, or someone with very generous Guaranteed Annuity rates (safeguarded benefits), would knowingly give these up in exchange for the investment risks associated with the benefits of flexibility and control of an alternative plan.
    My main concern is that the adviser responsible for giving and implimenting the advice to transfer is going to be open to a plethora of future complaints, probably initiated by some Complaints Management Company (CMC), irrespective of the quality of the research and the numerous risk warnings given to the investor at the time.
    Another barrier is the huge premiums, massive excesses and exclusions now being applied by Professional Indemnity insurers that in turn has an adverse effect on the adviser firm’s capital adequacy requirements.
    I simply will not go there, and any adviser who does better be prepared for the fallout!

  2. I am fortunate that I am being approached by professional fund managers with large CETV figures who want to run their own funds, and the Critical Yields are very low at the moment, so they understand and accept the investment risks. I think they are probably some of the few exceptions, and even amongst them I have seen poor value CETVs and we have not proceeded.

    I expect it will all quieten down soon, many DB members will not be prepared to pay for a report if the outcome is a negative recommendation.

  3. @ Douglas balilie-I’ve got a client with a £100k pot with 9% GAR, which appears from the outside as excellent ….but on further investigation the GAR is only available on a single life basis, no guarantee period and annually in arrears. With my client being married and his wife limited pension income in her ownright, the GAR is about as much good as a solar powered foghorn !!
    Advisers have dealt with GAR’s without the TPS qualification for years and it should remain so.

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