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Perfect storm: Advisers and FCA struggle with DB transfers


Advisers are scrambling to keep pace with the frenetic demand for advice on defined benefit pension transfers as the FCA looks set to dial up its scrutiny of the market.

One specialist transfer firm has stopped accepting new business due to being overwhelmed by transfer value analysis requests. At the same time, providers are committed to offering DB pension transfer advice, with some seeing this as the perfect opportunity to re-enter the market.

DB transfers have been the subject of much regulatory and political scrutiny, with various publications from the FCA and talk of a thematic review looming. Money Marketing examines if the regulator should have cause for concern around the suitability of DB transfer advice.

Suitability warning shot

The FCA has this year published two key documents concerning DB transfers and suitability.

In January, it published guidance that conducting pension transfers solely based on a generalised critical yield calculation would not meet its requirements. It says advisers must look at the likely expected returns on new investments in relation to critical yield as well as the personal circumstances of the client.

The regulator added it is aware of firms advising on pension transfers or switches without considering what assets their clients’ funds will be invested in, as it is concerned consumers are transferring into unsuitable investments or being scammed.

Earlier this month, the regulator issued a warning notice against an individual after their firms advised more than 700 DB scheme members about the merits of transferring to a defined contribution pension between 2006 and 2009.

As part of enhanced transfer value exercises, 500 DB members decided to transfer, with a total of £12.7m moved.

The regulator says many of these members were at “serious risk” of receiving unsuitable advice.

It was also revealed this month that a “skilled person review” has been ordered into pension activity at international advice firm deVere.

DeVere has confirmed the review relates to pension transfers and transfer value analysis. The firm has also entered into a voluntary agreement with the regulator to stop giving pension transfer advice.

In addition to this work, advisers are bracing themselves for a wider FCA thematic review around DB transfer advice.

Intelligent Pensions head of pathways Andrew Pennie says the FCA  has been having regular discussions with companies involved in the DB transfer market. He says: “We have dialogue with the FCA around DB transfers and the process and issues.”

But one senior pensions source told Money Marketing they were concerned a thematic review might kill off the DB transfer market too early, without having proved widespread consumer detriment. They say: “It would be the wrong thing to create turmoil in the market. The important thing is creating a position where advisers and the regulator agree how advice on DB transfers should be constructed, and make sure everyone is equipped to do it effectively.”

“There are no shortcuts to giving DB transfer advice.”

Pressure ‘bubbling up’

Pension freedoms have led to high volumes of DB members exploring the possibility of transferring their fund, given the soaring transfer values on offer.

Latest figures from Xafinity’s Transfer Index show the transfer value for an example pot as at 31 January was £232,600. The index tracks the transfer value that would be provided by an example DB scheme to a member aged 64 who is currently entitled to a pension of £10,000 each year starting at age 65 that increases each year in line with inflation.

Pennie says the fact the FCA is issuing new guidance suggests the regulator has evidence there are market issues.

He says: “It is a complicated area of advice and there are a lot of factors at play to do that detailed client and scheme research. It can be hard to get the right outcome. There are no shortcuts to giving that advice.

“Historically there might have been, in the sense that people just relied on the critical yield calculation and didn’t look at the personal circumstances.”

KPMG partner David Fairs argues there is no fundamental problem with DB transfer advice, but that issues are coming to light because of an increased volume of work.

He says: “We are seeing, both on an individual basis because of freedom and choice and the flexible retirement options, that the number of transfer quotes being asked for and analysed are increasing significantly, which is putting strain on the system of advice that is available to help people.”

Aegon pensions head Kate Smith says: “We have got pension freedoms on one side, with more and more people wanting to access them from the DB world, these very high transfer values and the other issue is DB schemes in trouble. This is all bubbling up.

“The FCA is trying to make sure advisers follow the rules with the focus on making sure they are looking at the assets they are transferring to under the DC scheme and working out who is responsible for that.

“We don’t want advisers to be put off advising on transfers. It’s the same with consumers; where they really want to access the freedoms or are concerned about their scheme, they shouldn’t be put off or prevented from transferring because they cannot find a good adviser to help them out.”

According to figures from the Personal Finance Society, around 7,000 Chartered Insurance Institute statement of professional standing holders are qualified to give pension transfer advice. The PFS says there are another 1,000 advisers working towards a pension transfer qualification.

Pennie says there is a message in the industry that there is a “lack of supply” of advisers giving pension transfer advice. He says it is important for advisers who do offer that service to advise on DB transfers regularly. He says: “If you are not doing it on a frequent basis it is a risky area to be in because you learn from experience. We are doing 40 to 50 a month and are constantly learning from that volume. You are either in it, and in it properly, or you are outsourcing to someone else who is.”


Overstretched outsourcers

However, strain on the industry is not just impacting advisers but also outsourced companies advisers use for DB transfers. Transfer value analysis provider O&M Pensions Solutions has recently started turning down adviser clients because they have reached capacity.

The move affects new customers only and came into effect last month.

Director Jason Wykes says: “A lot of existing customers have sent in a lot of cases so we want to focus on those. Existing customers can still send in their cases.”

Hymans Robertson corporate consulting head Jon Hatchett says major providers which left the DB transfer market are now starting to re-enter, albeit by taking a “risk-averse” approach.

He says this should not necessarily be viewed as negative by advisers. He says: “Advisers might view it as competition, or they might view it as somewhere good to go and work because these firms will need to hire quite sizeable numbers to offer this. They might find it helpful because they don’t want to give this advice and they can pass on this part of advice.”

Standard Life-owned advice business 1825 offers DB transfer advice services. Prudential’s financial planning business introduced a team to give customers advice about DB transfers after FCA approval in October. A source says they also expect another large provider to join the market later this year.

Insistent client issues

Other challenges in the DB transfer space that are adding to the pressure on advisers include ongoing issues with insistent clients and misinformation to consumers.

Hatchett says he is aware of advisers changing their approach to insistent clients after talking to the regulator.

He says: “Some advisers who had a policy of not processing them have decided it is lower risk for them and the member to process it rather than refuse it based on conversations and communications from the FCA.”

Misinformation about DB transfers is also leading to consumer confusion about the value of their transfer.

Fairs says: “The transfer values may look relatively large at the moment but, within that, if you are going to beat the income you are giving up, then that means the individual has to take on some level of risk to outperform the underlying interest rates within the transfer value. People do not always understand that, particularly where the defined benefit is a cornerstone of their retirement planning.”

DB transfers and poor projections

Question marks-confusion-puzzle

An adviser has alerted Aviva to issues with its retirement illustrations that he says are proving misleading for clients.

Combined Financial Strategies chartered financial planner Jonothan McColgan says for illustrations relating to certain with-profits funds, Aviva uses the transfer value of a fund rather than the current value when showing potential future performance.

He says: “They are taking into account terminal bonuses that are not guaranteed. The impact of that is the projected charges are a fraction of what they should be.

“What it does for us is throw up really bizarre anomalies under the reduction in yields. It is now common under the low growth assumption to have negative growth assumptions but what you are ending up with is a pension that is not even getting back to its starting value.”

Aviva says its annual money purchase illustrations are governed by Financial Reporting Council rules. For with-profits policies, those rules state: “The current fund must be based on a realistic asset value such as…for a with-profits fund or if assets are not readily marketable, a value consistent with the principles of actuarial technical standards.”

A spokeswoman adds: “We believe this is best expressed as the transfer value rather than the current fund value, and remains consistent with the principles of this standard, because the transfer value is the member’s fair share of the distributable assets of the fund.”

CTC Technology chief executive Nigel Chambers cites research from his firm that shows, for the fourth year running, there are differing growth rates used for the same asset class from provider to provider. Chambers says this leads to added complexity and confusion for those choosing to drawdown their pension fund and remain invested.

He says: “More and more people with DB benefits are exploring their transfer options. The FCA has issued recent guidance to ensure that illustrations are provided before any transfer takes place. When analysing a pension transfer it has always been essential to understand the future investments, as these define the charges which must be embedded into any transfer value analysis calculation.”


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. It will snow on the sun before we get involved in DB transfers. A claim waiting to happen.

  2. To be fair any advice we give is a claim waiting to happen, just that DB transfers will be flavour of the month for ambulance chasers if the FCA decide to move the goalposts.

    The starting point must always be no, then why? Prove that it would be in the best interests of the client to give up the supposed guarantees, this may get easier if employers are allowed to reduce or eliminate inflation linking to lower the liability and more BHS situations pop up. Poor health, death benefits and availability of significant non pension assets are influencing factors

    I have every sympathy for those who do not wish to get involved, I believe I have a robust process, but only time will tell.

  3. There is a lot of money to be made from providing this type of advice. However, advisers need to tread with care as we don’t want a repeat of the pensions mis-selling scandal from the late 1980’s and early 1990’s.

  4. Having just gone through the DB transfer process for my wife and I, I can confirm it needs serious attention. We did not want any advice as for us it is a clear cut ‘no brainer’ to transfer……….but the “freedoms” mean we were forced to employ an advisor. He is very good, but clearly wary of the whole DB transfer market from a risk perspective, which meant we were forced to go through the entire financial planning lifecycle, which itself is painful at the best of times. I have consistently argued that with gilt yields as low as they were at the end of last year, many will look back and wish they had been advised to transfer at a time when TVs can be more than 40x projected pension – many people would want the chance to take £400k and take their chances, rather than rely on a £10k per annum index linked guarantee. We may well be faced with double-edged redress if interest rates (and hence gilt yields) rise – those who shouldn’t have transferred, and those that should have……………I suspect the latter may well outstrip the former. And if the government do proceed to allow employers to reduce DB commitments (thereby reducing benefits), then the complaints from those who could have got out will escalate. It is a complex advice area but there is a significant proportion of customers who should transfer whilst gilt yields are at this level.

  5. Trevor Harrington 23rd February 2017 at 10:54 am

    A transfer out of a DB scheme is so rarely in the best interests of the client, and when it is in their best interests it is blatantly obvious, that I find it difficult to believe that this business is anything other than microscopic …. obviously the regulator has the same opinion …. good for them.

    If an Adviser wants to advocate a transfer out off a DB scheme for the client, then the solution is for the adviser company to operate the “four eyes principle”.
    The “four eyes principle” is that any such piece of advice needs to be signed off by another Adviser (preferably the compliance officer) BEFORE recommendations are made.

  6. I outsource requests from Clients to transfer DB schemes. Surely, if it is advised ‘in-house’ there is necessarily a potential conflict of interest; keep the DB scheme = no income for the adviser, transfer DB scheme = income for the adviser?

  7. In the new fee charging environment advisers can actually make money from this type of advice by either scenario i.e. leave the benefits where they are or transfer. I am sure that most consumers wouldn’t thank an adviser for charging them a fee for telling them to leave their benefits where they already are. However, if a customer wants to look at a possible transfer and leaving the benefits where they are is the best advice. It would be money well spent, as it would have prevented them from taking a decision to transfer that wouldn’t be in their best interests.

  8. John Hutton-Attenborough 23rd February 2017 at 12:00 pm

    @ Ted,
    Charge for your advice and not the solution. If the advice is that the client should not transfer then there should be no reason why you cannot charge for that advice. No conflict!

  9. Whereas the miss-selling (incidentally, ‘before my time’) was comparing apples and apples (i.e. which will give you the highest income stream in retirement) the Freedoms have turned that on it’s head.

    From a purely financial point of view, DB will (in the vast majority of cases) give a greater income in retirement HOWEVER who wants a pension indexing up at 3% p/a once they are 85+?
    What we’re finding is that the ‘shape’ of DB benefits don’t suit those who are seeking to take advantage of the Freedoms – thereby meaning that we are not comparing like with like and the guarantees are not the most important thing to the client (desired lifestyle, early/phased retirement and having enough to live on for the rest of their life typically being what is important).

  10. I charge the firm a fixed fee whether it goes ahead or not, so the advice is at arms length and not influenced by any commercial reward. Unless there is a good case for transfer the adviser will have wasted their time, so this tends to filter out the non starters early on.

  11. The issues are clear, there is no clear guidance or process from the Regulator, not even a clear regulatory warning to consumers that should be used. Most advisers are more afraid of the FOS. What we have is advisers having to police what is and is not suitable/correct to transact whilst waiting for the regulators to catch up with the current market. Based on past experience the regulator will be approximately 7-10 years behind the curve. At this point they will then state its not their fault, but this is what we need to do now. The industry will then have to pay out billions for the regulators slow response and inability to protect consumers.

  12. @JH-A Yes I know that you can charge whichever way it goes. My point was that human nature will inevitably lead to influence in favour of transferring if the choice is a fixed fee for ‘No’ and an ongoing fee for ‘Yes’. Also, presumably the fee for ‘No’ is much less than the fee for ‘Yes’?
    @Paul – Yes, spot on.

  13. Lets be very clear with this one. The FCA and the FOS will invariably come down on the consumer’s side on virtually all (if not 100%) cases of DB transfer complaints. This IS going to lead to businesses going up the Swanny River and involvement of FSCS. It is a disaster already in the making and nothing will change that unless advisers get regulatory agreement that implementing against advice removes all regulatory protection regardless of the story from the complainant. This will never happen so unfortunately we are going to have to accept the future consequences will be expensive for all those who steer well clear of this train crash.

  14. I am surprised to see a lack of commentary about the significant differences in the event of death of DB/pension fund holder, both before and after retirement, including IHT implications. The ability to determine what happens to this significant asset could be a major consideration for some. Furthermore, with state pension age being moved further into retirement beyond DB scheme retirement date, for most members, it is now impossible to easily have a regular, inflation proofed income in retirement.

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