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Martin Tilley: Words of warning on toxic transfers

Martin Tilley Cut Out Medium

The new pension freedoms are finally here and, as both national and trade press have reported, there is huge interest in the drawdown flexibility and more favourable treatment of funds remaining on death. Much of this interest will come from members of defined benefit schemes who previously enjoyed neither the flexibility of income nor, in many cases, any return on death whatsoever.

Clearly for some scheme members the sentiment of the flexibility and possibility of retaining control of what can often be a substantial capital sum on their death will be quite compelling. However, crunching the numbers and looking at a like for like value of total benefits receivable or critical yield requirement will often result in a (quite correctly issued) negative recommendation from an adviser, whose advice will be required before such a transfer can take place. And herein lies the problem…

A client may approach their adviser and receive a negative recommendation but, armed with this information, still wish to make a transfer to a scheme facilitating the pension freedoms they find so attractive. 

Increasingly, we are seeing networks banning their affiliates from transacting such business and compliance specialists referring to the process as potentially just too toxic.

The immediate solution would appear to be for a client to sidestep the adviser once advice has been given. A defined benefit scheme is required to receive evidence that the member has been provided with appropriate regulated financial advice in connection with the proposed transfer to a flexible drawdown scheme but it does not have to see the outcome of that advice. Indeed, provided it can check the regulatory permissions of the adviser involved, it is obligated to release the transfer as requested by the member.

The challenge facing the member will now be finding a pension provider that will accept the transfer. Standard Life, Fidelity and Sipp providers James Hay and Talbot and Muir are among those providers that have stated defined benefit transfers will be accepted only with a positive recommendation from a regulated adviser.

Surely there must be something wrong with a system where the threat of regulatory action is such that both advisers and pension providers are unable to transact a client’s instruction when they have clearly received information on which they should be able to make an informed decision. Has the Government manufactured a nanny state whereby its regulators and ombudsmen prevent the implementation of freedoms that it has itself created?

The situation is pertinent to the consultation released last month covering the proposed sale of annuities to a second hand market. The Government announced this as offering exactly the same freedoms to those who already have annuities in payment to those individuals now approaching retirement. What is an annuity if it is not a defined benefit, albeit one that is in payment rather than one that would come into payment from a defined benefit scheme?

Adopting the regulator’s TCF principle but substituting the middle acronym as ‘consumer’, then surely exactly the same advice requirements must be adopted as are in place for defined benefit transfers. The advice market for advisers in terms of annuity sale advice is likely, if anything, to be more specialist than pension transfer advice since the period of time that the annuity would be in payment will be determined by health assumptions. This, I fear, is a step too far for independent financial advisers to take.

So in its annuity sale consultation document, the Government outlined the necessity to consult on the levels of regulatory requirements to ensure the protection of the consumer (vendor) as well as the regulatory requirements of the adviser willing to advise on annuity sale and by logical conclusion an inability of a purchaser to buy without a positive recommendation.

The annuity sale proposal based on current trends is, therefore, doomed to failure unless a common sense solution to the transaction of business by a willing and educated consumer is permitted by regulated advisers and providers. And if this solution could be equally adopted for defined benefit transfers then the voting population might be able to take advantage of these political promises.

Martin Tilley is director of technical services at Dentons Pension Management



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Proof of advice having been received with no detail as to what that advice was is completely pointless. Providers should decline any such transactions other than via a regulated adviser. My guess is that positive recommendations will be vanishingly small in number, not least because anyone wanting to take a CETV before retirement age will also be opting out from any future accrual. What adviser in his/her right mind would touch that with a barge pole?

    Yet consumers who cannot find anyone to support their wishes will probably then complain that, despite these new freedoms which are supposed to enable them to do what they want with their pension funds (or the CETV of their accrued pension benefits), they’re blocked at every turn from actually doing what they want. So when the first complaint case goes to the FOS, the FOS (in theory) may well order the provider to do what the consumer’s asking for. Then, when another complaint comes along a few years down the line, the provider will (again, in theory) be able to say We didn’t believe this course of action was in the customer’s best interests and we declined it but the FOS ordered us to do it anyway. What then?

  2. “Has the Government manufactured a nanny state whereby its regulators and ombudsmen prevent the implementation of freedoms that it has itself created?”

    Sort of.

    The real question is “Have the FCA and FOS manufactured a state of fear and mistrust in regulated firms that hinders the implementation of freedoms created by a Government that has failed to regulate the regulator?”

    You bet. Of course, it goes wider than that but the picture is clear. I don’t believe it’s been done deliberately but it is the consequence of the way they have acted. Applying a bit of ‘behavioural regulation’ would have given strong indications of where this would end up. Instil fear and uncertainly and you will see a retreat to safety which precludes creativity, innovation and taking risks.

    So, now the Government need the industry’s help perhaps they’ll sit up and take notice… maybe not…

  3. To answer your question Julian, very simple. It is highly unlikely that the FOS will make any ruling in favour of the consumer in the complaint scenario you mentioned above. It will have been a non-advised sale by definition, if the original adviser advice was not to transfer it and the consumer still proceeds. We are all in danger of getting very up tight over what is likely going to be a very small number (in the scheme of things) of cases.
    The huge majority of our own long-standing clients are unlikely to go against our advice in the first place so I think that is a non runner of a situation. prospective clients who come to us asking for us to look into “Getting me my money from my pension” should have our advice process for this explained to them very clearly we charge to do the work needed to make any recommendation and this is an up front payment. That will likely reduce the number wishing to use your service. That leaves a small number who are willing to pay for you service and advice. If it is in their interests to transfer, transfer it, if not your paid for recommendation report will be your savour and you will have made some money for your valued time and expertise. I think this is excellent news all round and something I am actively looking at implementing later in the year. Still working on the amount to charge though for this though.

  4. Yes, but the scenario I envisage is one where the provider won’t allow encashment of existing policies or refuses to accept a CETV of defined benefits other than via a regulated intermediary and the customer can’t find any regulated intermediary willing to facilitate such a course of action, even on an EO or IC basis. And nor (if they’ve any sense) will most intermediaries be prepared merely to sign a statement confirming that they’ve given advice unless such a statement sets out what the advice actually was, in most cases Don’t.

  5. I have a good idea. It requires intelligence and logic and the ability for politicians and regulators to think clearly. If we stop being blinkered by the current rules and regulations it is really quite simple. All transfers in excess of £30,000 require advice from a qualified financial adviser. So the process could be as follows:
    i) Scheme member visits adviser and obtains details of the advisers fees for carrying out the TVAS.
    ii) scheme member engages the adviser to do the work.
    iii) scheme member supplies details of adviser firm and agreed fee to Trustees of ceding scheme.
    iv) Trustees produce CETV having incorporated the reduction in final salary benefits caused by the deduction of the advisers fee if the member decided to remain in the scheme. This fee would then be paid by the Trustees to the financial adviser if the scheme member decides to proceed with the investigation into transferring out.
    v) Financial adviser produces advice incorporating TVAS and makes recommendation to the scheme member, together with copy of advice to trustees.
    vi) Trustees then obtain instructions from scheme member about whether or not to proceed and pays fee to Financial Adviser, and reduces benefits for scheme member if he/she does not transfer or reduces CETV if transfer is made.
    vii) Scheme trustees inform scheme member that there is a statutory period of x weeks where he/she can reflect on whether or not to transfer. Equivalent process of second line of defence should be carried out by the trustees. If transfer proceeds, Trustees then pay CETV to the new scheme provider.
    viii) Neither Financial Adviser nor new provider then has any liability if scheme member agrees to proceed AGAINST advice.
    Strikes me this is fairer to all, and that Trustees should not be able to be sued unless they fail in their duty of care. Providers and advisers then are not responsible for repercussions of an unsuitable transfer UNLESS we ADVISED them to do it without good reason.

  6. @Brian Gannon
    Great idea and would work well. The only flaw is the sentence at the beginning that includes the words ‘logic’, intelligence’ and ‘think clearly’ alongside politicians and regulators…

  7. @BG & GA _ sound very sensible to me too. I dont have AF3 and if I knew that this is what would happen I would be happy to continue NOT to have AF3 and to introduce to advisers who want to do this. This could be similar to the “clearing house” system others are saying would make sense for insistent consumers with DC schemes and for annuity resales.

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