Pension freedoms have opened defined benefit members’ eyes to the mouth-watering fear advicefer values currently on offer if they give up their guaranteed benefits and move to a defined contribution scheme.
At the same time, the FCA’s requirement that people transferring out of a DB scheme with a value of £30,000 or more must take regulated financial advice has increased demand for advisers’ services.
That said, the sheer volume of requests and concerns about the risk of future liability among advisers and their professional indemnity insurers have led some advisers to shy away from this market, resulting in fewer to service the demand.
Referring clients to DB transfer specialists may be the preferred option for those not active in this market. However, the news pension transfer specialist Intelligent Pensions has voluntarily suspended DB transfer advice after talks with the FCA has hammered home that even reputable experts are subject to pressure and scrutiny.
The news follows reports that Welsh advice firm Strategic Wealth UK and de Vere UK have been subject to similar investigations.
So where should DB transfer advice go from here?
Some commentators point to an apparent contradiction between DB members having a statutory right to transfer to a DC scheme and the FCA’s starting assumption that such transfers are not in the members’ best interests.
ARC Pensions Law partner Kate Payne calls it an “odd mismatch”. She says: “There needs to be a better link-up between the Treasury, the Department for Work & Pensions and the FCA. Pension freedoms were introduced by the Treasury, the DWP effectively put in place the requirement to take advice on transfers of more than £30,000 and the FCA is saying ‘We know you can advise on transfers but the starting point is that it’s not in the client’s best interests’. It’s a strange starting position to say it’s not suitable. If you’re a single person with no dependents, why not take the money?”
While Payne agrees it is right the FCA’s focus is on ensuring any potential transfer is suitable for the client, she believes this needs to be based on the full facts rather than general assumptions that pre-date pension freedoms.
If the barriers in the way of DB members exercising their statutory right to transfer and getting suitable advice continues, she worries this could increase the number of insistent clients. She is also concerned that, if people cannot access advice from a reputable adviser, more could become susceptible to the scammers and undesirable firms the regulator is trying to clamp down on.
Dentons Pension Management director of technical services Martin Tilley says many advisers find their ability to work with clients is fettered by the FCA guidance.
He says: “An adviser will come across a wide range of clients: some in relative poverty, some wealthy, some in poor health and some in good health. All these will have differing starting points and different objectives, so not being able to start with an objective clean sheet of paper is preventing an adviser servicing their client’s need. Having to start with any regulatory message in the background other than ‘you must act fairly and in the interests of your client’ will steer an adviser.”
Others point to the current regime not being fit for purpose because it was designed before pension freedoms, when it was presumed the majority of people would buy an annuity.
DB transfers: How we got here
2009-2012: Bank of England cuts interest rates to 0.5% and starts quantitative easing following the 2008 financial crisis. Falling gilt yields cause annuity rates to drop and DB transfer values start looking attractive.
2015: Pension freedoms introduced. Demand for DB pension transfers increase and requirement for advice on transfers valued at more than £30,000 puts a strain on the supply of qualified advisers.
2016: Xafinity reports EU referendum and Brexit pushes DB transfer values to record highs. Interest rates are cut to 0.25% and QE is extended.
2017: Intelligent Pensions becomes the latest advice firm to halt pension transfer business after discussions with the FCA. This follows reports that Welsh advice firm Strategic Wealth UK and de Vere have been subject to similar investigations.
Progeny Wealth director Alex Shaw says: “The checks and balances are less relevant because they are stuck in a pre-pension freedoms hamster wheel. We’re going round in circles trying to relate modern circumstances back to pre-pension freedoms.
“How many people go to annuities today? Yet the crux of this transfer value analysis is all about critical yield and annuity rates. Something needs to change in the way the regulator is hanging its hat on this process which is out of date. We need to look at whether there is a more realistic income measure to replace annuities, something more appropriate.”
Lane Clark & Peacock partner Bart Huby also thinks it would be helpful to move away from the current TVAS process, which requires complicated calculations on what it would cost to replicate DB benefits.
However, he says: “Given the variability in transfer value calculation bases between different schemes, it is important that, were the TVAS requirement to be removed, there would be an objective benchmark to compare the transfer amount against to see how generous it is compared with other schemes.”
A recent Money Marketing cover story found the FCA is carrying out a “multi-firm supervision exercise” on DB transfers. This has involved collecting client files from firms and resulted in follow-up supervision, including the requirements placed on Intelligent Pensions and Strategic Wealth. It has stopped short of full enforcement actions, such as fines or bans.
But the regulator is sharing little more information as to why it has suspended certain firms’ DB transfer business, and the silence is deafening to those seeking further clarity around what constitutes acceptable practice.
Technical Connection head of pensions consultancy Samantha Kaye says the FCA is picking up on firms that have increased the volume of their DB transfer work and are investigating those transfers with a fine tooth comb.
She says: “Unfortunately, there is little feedback for the rest of the industry as to why these firms have suffered this fate, which creates fear in the minds of the advisers still processing transfers. FCA guidance is a must.”
The regulator has said it will publish a consultation paper on DB transfers “in due course”. However, compliance firm TCC advisory director Phil Deeks points out that advisers cannot just wait for this to materialise.
It is a strange starting position to say it is not suitable. If you are a single person with no dependents, why not take the money?
That said, not all advisers feel further clarification is needed. Deeks says: “Some firms say it’s already fairly clear – they start with the assumption that it’s not suitable and work back from that. They think there’s not a lot more the FCA can do and are not sure of the need for a consultation paper because they fear it will hamper them. The FCA has a wealth of knowledge from where it sees advisers doing well, so it might provide clarity in terms of good and poor practice in what they’re expecting rather than hard and fast rules.”
What is clear is that if the FCA is going to make guidance on DB transfer advice a priority, it will require time for careful consideration.
Altus consultant Sam Turner says: “We’ve been encouraged by responses that suggest advisers are working together to share best practice around DB transfers – this could be embedded in the consultation process.”
Many commentators feel a pre-advice triage system would help advisers by separating at an early stage enquiries that have a strong case for proceeding to a transfer from those that do not.
Some also believe partial transfers out of DB schemes could provide a practical solution, mitigating the potential risks of full transfers so that clients can access pension freedoms while partially retaining the security of a guaranteed income.
Royal London business development manager Jamie Clark says: “Solutions that should be explored include offering people the statutory right to a partial transfer, which has received support from advisers and providers, as a way in which risk can be reduced for both advisers and consumers.
“Mitigating the risk to advisers and consumers where there is so much demand will not only allow more people to access advice, it could also make it cheaper.”
Adviser view: Neil Wortham, head of partnership support, Foster Denovo
As a business, we do not advocate advisers making decisions on DB transfer advice on their own, given the high risk nature it poses. Instead,
we have a committee which meets at least weekly, and this is the platform for DB qualified advisers to present individual client cases to their peer group.
If the advice is to proceed with the transfer, the case can then go to a full detailed analysis before it is finally reviewed by the company’s designated pension transfer specialist.
This approach brings together our experience and knowledge and assesses what is right for the client, as well as the associated levels
Even those advisers who do not possess DB transfer experience should be aware of which of their clients have been members of such schemes.