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Steve Webb: Re-writing the DB transfer rules

steve-webb-700x450 Opinion

In the past few years, house price inflation has run at such a rate that people’s homes have earned more money than they have. The same has started to be true for some people with defined benefit pension rights.

The recent fall in interest rates means the transfer values being offered by many DB pension schemes are now far higher than a year ago. Cases where transfer values have risen by tens of thousands, or even hundreds of thousands, of pounds are not uncommon.

But can we be confident that the current regulatory regime ensures the option to transfer is taken up by the right people? And that others who should not be giving up valuable DB rights are not tempted to do so by the huge cash sums on offer? There are three key changes to policy and regulation that need to be made if we are to ensure the transfer process works effectively.

1: Updated regulation

The first is that the regulatory regime needs to be updated to reflect the advent of pension freedoms. The current rules were written in an era when it was reasonable to assume most people who transferred would use all or most of their transferred cash to buy an annuity. That assumption no longer holds.

If someone specifically intends to take the cash and invest it for the long term in a drawdown product, it seems odd to undertake a transfer value analysis benchmarked against using the funds for an annuity.

2: FCA and FOS consistency

The second change is that the relationship between the approach taken by the FCA and the Financial Ombudsman Service needs to be reviewed for consistency. A vital part of a functioning transfer market is advisers having confidence that, when they do their job properly, they will not find themselves unfairly challenged at a later stage.

However, I have come across cases where advisers who have followed FCA guidance in providing transfer advice have faced a complaint to the FOS, which appears to apply its own rules as to how the process should work. It is vital there is consistency between the two bodies.

3: Partial transfers

The third key change is that members of DB pension schemes need to be given the right to a partial transfer of their DB rights. At present, the decision as to whether or not to transfer your DB rights is often a binary choice: transfer all or transfer nothing. For some people, though, the option of a partial transfer might represent a better outcome.

A combination of guaranteed income from the state pension and part of your DB pension, plus a cash lump sum to be invested, might be the right mix for some and should certainly be an option. Although some DB schemes will offer partial transfers, they are under no obligation to do so. This means too many savers end up with a stark choice between staying put and surrendering all of their DB rights.

We recently published a guide setting out five reasons to think about transferring and five reasons not to. On the plus side, a transfer can give you much greater flexibility, can improve access to tax-free cash and can improve the prospects of leaving some of your pension wealth to the next generation.

On the other hand, giving up your DB pension means taking on investment, inflation and longevity risk. Many people would be better served by leaving those risks in the hands of their company pension scheme. The balance between these factors will be different for each individual.

For understandable reasons, the FCA requires advisers to start from the premise that a transfer will not be in a member’s interests. One advantage of this approach is that it highlights the considerable value inherent in DB pension rights.

But I have spoken to a number of people for whom a transfer was clearly the right thing to do. For this reason, it is vital there is a good supply of well qualified advisers, willing and able to advise on transfers, and confident they are backed up by the regulatory system when they do a good job. That is why the current rules need to be looked at again.

Steve Webb is director of policy at Royal London

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Comments

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

  1. With regards to point one I only use the TVAS Critical Yield as a guide to the fair value of the transfer, then run drawdown projections to compare against the projected DB benefits as in reality this will be the outcome.

    Point 2 is what we have been saying for some time, give us regulatory protection and both advisers and PI insurers will open up the market for advice.

    Point 3 makes sense, at least the DB scheme can reduce some future liability and the client has a guarantee and flexibility.

  2. Something to think about. My concern is that you have advisers transferring secured benefits and putting it all in unsecure environments. If markets fall this will be the next PPI miselling. We need to ensure we protect clients not look for a fund to charge an ongoing fee on?

  3. Well said Steve. Totally agree. But if you really think our broken and self serving system of regulation and compensation can deliver, I believe you are p***ing in the wind!!

  4. Mr. Webb is on the money. If we look at TPR, FCA, Money Advice Service etc. they are all still stuck in the dark ages pre- Pension Freedoms 6th April 2015. Money Advice Service still states: “In most cases you’re likely to be worse off if you transfer out of a defined benefit scheme, even if your employer gives you an incentive to leave”. Really? Dangerous assumptions they are making. They all need re-trained and programmed urgently.
    The biggest worry of all though is the lack of any pension transfer experts at all at the FOS. Under an FOI request they advised me they don’t have anyone with G60/AF3 higher level pension qualifications etc. ruling on occupational pension transfer advice nor do they have any central record of the qualifications their staff do have! What an admission! It is like a brain surgeon having their wok supervised by the hospital cleaner. Simply not good enough.

  5. Work not wok in my last comment!

    Expect a full FCA thematic review of post Pension Freedom advice re: DB transfers in 2017.

  6. @Geoff Sharpe – I agree with all three of your points. Re point 1 – The O & M TVAS report shows both the critical yield for annuity purchase and the “hurdle rate” of growth needed if drawdown is used to mimic the net income that would have been received by staying in the DB scheme. We can then use Cash Flow Modelling to model the actual level of income that the client might need to take from the transferred funds rather than comparing it with the scheme amount.
    Point 2, I agree with you. Point 3 I agree with you entirely, it is legally possible for trustees to allow partial transfers so let’s start asking why this isn’t offered to get administrators/trustees to consider this option more frequently. @Ian Wishart, yes it is worrying that there is no one at all at the FOS with G60/AF3.

  7. Richard Robinson 5th January 2017 at 8:25 pm

    As a holder of a DB pension and a 42X transfer value, my experience has been that IFAs very quickly loose interest when all I ask for is advice and mention my clear intention to transfer to an execution only SIPP / flexible drawdown. I have managed one for ten years very successfully. The TVAS as far as I can tell is so full of assumptions it offers no information of benefit and does not weigh personal factors correctly. Clearly at the extremes of pension transfer the advice is obvious but for the middle rump it is quite possibly whatever the IFA chooses to make it. Why does it take companies like O&M to do a few calculations 6 weeks – this is not rocket science but it does appear to be smoke and mirrors. Sorry guys this industry is definitely wearing kings clothes.

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