Those IFAs who are still regularly advising on transfers out of company schemes must be as comfortable with risk as their clients need to be in light of the critical yields they will be quoted. A small minority are skating on very thin ice by persisting in promoting transfers from final-salary schemes in the face of clear signals from regulators and Government that they should not.
Maybe part of the problem is that transfers remain legitimate and worthwhile transactions for some people but a spate of announcements from pension authorities has changed the advisory environment so that in future transfers should be the exception rather than the rule.
Conversing with pension intermediaries on a regular basis as I do, I often get the impression that transferring out of defined-benefit schemes to personal pensions happens very rarely, yet consumer groups say the practice is still widespread, particularly where tax-free cash incentives have been offered.
The view that transfers out of final-salary schemes are seen as a priority can only be reinforced by a rash of announcements on the issue in the last week of January from The Pensions Regulator, the Revenue, the Actuarial Profession and the Department for Work and Pensions.
Probably the riskiest form of transfer business for advisers is the kind where cash payments, described in the press as sweeteners, have been made direct to the employee outside the pension wrapper. The Pension Regulator last month made clear that it does not want trustees recommending these payments in the first place, so any IFA in the midst of bringing an employer’s pension costs under control through such offers, with or without bungs, should be thinking again.
There are also IFAs, some of them respected names in the industry, drumming up business with scare stories about the collapse of final-salary schemes. A short search for pension transfer IFAs on the internet takes you to some marketing literature that would send any decent compliance manager red with anger. What happened with workers at ASW and the other estimated 125,000 scheme members who lost pension rights may have justified such scare stories a few years ago but, since the Pension Protection Fund, the arguments for transferring on these grounds are a lot more circumspect.
The new DWP rules for scheme-specific calculations of transfer values, which more or less enshrine current practice in law, mean members will get less than they might have had if some of the alternative approaches being put forward by the industry had been adopted. This should make transfers less likely to happen but it also increases the risks for any adviser making transfer recommendations.
The thought that senior members of the actuarial profession and life offices such as Standard Life refer to the DWP’s specific approach to valuing final-salary benefits as an alternative to the “fair value” approach should sound warnings to IFAs effecting transfers. If transfers are not being made on the basis of a calculation at fair value, then, in our compensation culture, it is not wild speculation to suggest that consumers will demand retribution when they realise what has happened.
January saw The Pensions Regulator warning that it does not want trustees to recommend sweeteners to leave schemes, the Revenue ruling that any sweeteners will be subject to income tax and the Actuarial Profession demanding that any letters to members relating to transfers should carry a clear health warning in block capitals.
The pieces are in place for a costly and damaging review for IFAs who still recommend transfers in all but the most clear-cut of situations. Those situations no doubt exist but, where transfer offers are being made to entire swathes of usually deferred members, it seems to me that there will be a significant number of people who end up losing thousands of pounds in pension benefits as a result.
In 2004, the Occupational Pensions Regulatory Authority warned that it did not want to see trust-busting, with a picture of a shark on top of its leaflet. More than words ever could, it got the message over. Maybe the FSA needs its own shark picture.
John Greenwood is editor of Corporate AdviserMoney Marketing.