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Sweetener and sour

Transfer incentive business is risky and could come back to haunt advisers

There is a new danger for advisers to be aware of and avoid. After personal pension misselling and endowment misselling, we now have transfer incentive misselling.

Picture the scene. You are approached by one of your biggest corporate clients, XYZ Company. It has a rather troublesome defined-benefit scheme and the finance director wants to find ways to reduce the potential for this scheme to wreck XYZ’s balance sheet. XYZ’s lawyers and actuaries have suggested a way of doing this which could be very attractive to members with preserved benefits. If they transfer out before a certain date, XYZ will pay them a further lump sum as cash in hand as soon as the transfer goes through.

XYZ stresses that this is all legal and above board – so much so that it is even prepared to pay for the members receiving the offer to be given personal financial advice. This is where you come in. There are just one or two little details that need to be agreed in advance between yourself and XYZ. Your fees are clearly one detail. The other is the question of whether, given the terms of the offer, you will feel able to recommend acceptance to most of the members. If not, there is a clear implication that XYZ will look elsewhere for members’ financial advice.

What are the issues you would wish to look at before deciding whether to do this job? For a start, do you have the properly qualified resource? Not every IFA could handle a new client bank of a few hundred people, every one of whom needs to be seen over a short period by a member of your staff qualified to advise on transfers from defined-benefit schemes.

Assuming this resource hurdle can be overcome, what about the transfer values being offered? Using a modern transfer value analysis system, which properly allows for the risk of insolvency of the employer and the safety net of the pension protection fund kicking in, what critical yields are being thrown up? Are they in the ball park where you would consider recommending a transfer to a client who is not particularly risk-averse? After that, how should the existence of the cash in hand affect the calculations?

At one extreme, it could be argued that cash in hand should be ignored in the TVAS because that money could end up being spent on a nice holiday and will not help retirement one little bit. At the other extreme, it could be argued that each pound of cash in hand (net of any income tax due) should be valued at more than a pound of transfer value because you can do what you want with it.

A further relevant question is what happens if you have an insistent client? If you are likely to advise that a member should stay put but that member can think only of the cash in hand, do you withdraw from that case – and risk upsetting XYZ – or continue to act on the client’s instructions?

One key question is what will happen some years down the line if it turns out that the members who accepted XYZ’s offer have ended up worse off. Against whom, if anyone, do the former members have redress? The adviser is the obvious person on who the spotlight will fall. Are you confident that your files will stand up to this kind of scrutiny years after the event?

The attitude of the Government and regulators is interesting in all this. Until now, they have given every appearance of being relaxed about transfer incentives being a legitimate way for finance directors to manage down their accrued defined-benefit risk. After all, the members seem only too happy with the deal, so who is complaining?

For anyone who has been around pensions since the 1980s, this has a worrying ring of deja vu about it. I am not saying IFAs should or should not get involved in transfer incentive business, just that the risks of such business need to be properly identified and managed. These risks are substantial.

Stewart Ritchie is director, (pensions development), at Aegon Scottish Equitable


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