Is the Government using financial advisers to ward off another pensions scandal? That was the question asked by Money Marketing recently about plans requiring savers who transfer out of final salary schemes and into defined contribution ones to seek financial advice first.
The short answer to that question is no, of course. It would be more correct to say the Government is trying desperately hard to use advisers to that end. Whether it succeeds in its aim is another matter.
The real question is whether the couple of million savers in the UK’s 6,300 remaining schemes, plus another five million or so deferred members, will want to make use of that transfer option. Linked to that is the issue of how many financial advisers will be prepared to cater to that side of the market.
At first sight, the attraction of entering the defined benefit to defined contribution advice market seems obvious. For IFAs looking to replace lost trail and other sales commissions, picking up some of that potential wall of money waiting to go into a DC scheme could prove lucrative.
Moreover, as we know, there are clearly advantages for some DB pension plan holders who might wish to transfer. As LEBC longevity director Nick Flynn says: “Why have a joint-life final salary when you’re single? The same goes for health concerns, where there are other avenues worth exploring.”
He is right to make that point. There are other reasons, too: transfer values are now significantly higher than they were six or seven years ago, while the potential consequences for pension savers of an employer in difficulties should not be underestimated.
It is not long since Ros Altmann and other campaigners fought a bitter battle on behalf of 150,000 workers and their families whose company pensions disappeared when their employers’ final salary schemes failed. Her work led to the setting up of the Pension Protection Fund and the Financial Assistance Scheme, and for more compensation being offered to members of failed schemes.
Even so, levels of redress for many affected pension scheme members, especially those on higher salaries, remains relatively paltry, even now, by comparison with what they should have received.
Not only that, but surveys from the National Association of Pension Funds also show that for the ever-decreasing minority of active members of DB schemes, employers are either moving or thinking of moving the goalposts with regard to the rules on benefits payable, such as moving to career average salary, rather than the final year, or even an average of the last three years.
So the idea of switching from a DB to a DC scheme is not a stupid one and there will be some current members who might want to seriously consider such a move.
Deferred members, whose salaries and therefore pensions were pegged at lower levels set a decade or two ago, might also wonder whether a DC lump sum might deliver higher benefits if it was directly invested on their behalf.
The problem is how many DB pension plan members will be really interested in going down that route. The reality is members of DB schemes are, almost by definition, likely to be ‘conservative’ in their outlook.
They understand themselves to be in a privileged minority, especially those who have been members of schemes that closed to newer colleagues a long time ago. Deferred members will either be unaware of the debatable benefits of switching or they are counting down with bated breath until they too receive the pensions to which they are entitled.
So the notion of hundreds of thousands of DB members itching to switch is not one I recognise. Indeed, one effect of the recession that I have seen among people who have written to me over the past five or six years is that consumers want to hunker down more and preserve what they already have, even if the benefits are not guaranteed.
There is an additional factor in the equation – namely the many thousands of financial advisers who were badly scarred by the experience of the pensions misselling scandal a decade or more ago.
Those that survived the huge compensation payouts or massive hikes in professional indemnity cover were either very much on the margins of the pensions debacle at the time or consciously chose to stay out of it altogether. Even for them, as we know, PI costs rose significantly.
So the notion that they might want to re-enter a market they vacated and promised never to revisit feels like wanting to go back to a restaurant that was closed down by food inspectors because it gave you a bad dose of vomiting virus.
In and of itself, that should not deter a specialist firm with the right compliance systems in place, plus top-notch advisers with in-depth knowledge of DB schemes, from being prepared to offer a service to the minority looking for an alternative to their stagnating final salary schemes.
But this will always be a minority sport. If I were an adviser, there is no way I would want to get mixed up in what will effectively become the pensions equivalent of Arch cru another 10 years down the line.
If the Government wants advisers pull its chestnuts out of the fire, let someone else do it.
Nic Cicutti can be contacted at email@example.com