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Take the transfer money and run?

Scottish Life head of corporate business Mark Polson is not convinced by Vince Whitefoord’s recent suggestion in Money Marketing that pension advisers could face misselling claims if they do not recommend high-net-worth clients to transfer out of defined-benefit schemes

We are all used to seeing articles predicting the death of defined-benefit schemes but, in light of previous misselling scandals, most stop short of suggesting that people transfer their benefits out.

Wealth manager Whitefoord chief executive Vince Whitefoord clearly feels the time for such shilly-shallying is over, judging by his piece in the July 7 edition of Money Marketing. As a qualified actuary, he knows his stuff.

I am very far away from being an actuary. However, I do work for a company involved in taking on new defined-benefit clients, inc- luding those with schemes closed to new entrants or further accrual. So I was interested in his claims that pension advisers could be subject to misselling claims if they do not recommend their high-net-worth clients to transfer out of defined-benefit schemes.

I think the argument goes like this. Defined-benefit schemes are in trouble and the proposed GN11 revisions to the calculation of transfer values do not help. This is because they require transfer values to be calculated using bond rather than equity yields, which will drive up transfer values and put even more pressure on schemes. The fact that high earners will get their benefits capped if the scheme falls into the Pension Protection Fund just seals the deal. It is time for high-net-worth clients to grab their assets and run.

A powerful case but there are a few elements which do not ring true for me. Where claims of potential misselling are made, it is good to pause and consider both sides of the argument before the national press picks up the scent.

First, I am pretty sure that the new GN11 basis is still only at proposal stage. Apparently, there is some disagreement in the actuar- ial profession as to whether it is the correct route to take. Given that you can put three actuaries in a room with a sum to do – let’s say, two times two – and they will come up with three different answers, this is hardly surprising. So it is a bit early to be talking about misselling.

Even if the proposals do see the light of day, the really serious point is that nothing changes trustees’ duties to the scheme as a whole. One of the many responsibilities trustees have is to ensure that they do not pay out more to leavers, including those transferring out, than the scheme can afford. So, irrespective of the basis of transfer value calculation, if the scheme is underfunded, then it is underfunded. Trustees should not be paying out the full transfer value unless they have good reason to believe the sponsoring employer will make good the shortfall.

To suggest that high earners can improve their position by getting out now assumes that trustees and scheme actuaries have their eye off the ball and cannot spot an impending problem. In my experience, actuaries are only too aware of what is coming up and I am sure that many of them are already factoring in these potential changes to their planning.

On a more practical level, there are some hurdles in the way of advisers who want to start bulk-shifting high earners out. The adviser most likely to be able to take an enlightened view of the scheme’s position and its ability to pay out transfer values on the current or proposed valuation basis is the scheme adviser. They are normally retained by the employer and the trustees.

There is a conflict of interest between, on one hand, advising corporate clients on how to best run schemes and, on the other hand, facilitating a bombing run by high earners.

Next, remember pension misselling? One of the things which happens when you leave an employer’s scheme is that you lose their contribution. That is potentially a big deal, unless the leaver can negotiate the equivalent contribution to a defined-contribution arrangement.

That sounds OK until you start to think of the potential PR pitfalls. If the employer is not supporting the defined-benefit scheme by keeping it open to new entrants and the leaver is a person of responsibility within the company (as most very high earners will be), the unions and the press will have a field day.

We are all wise with hindsight. We know now that endowments had a good chance of not meeting their target and that people should not have transferred out of employers’ pension schemes. What happens if the defined-contribution arrangements that Whitefoord’s high earners shift their benefits into end up representing poor value? What happens if the ceding scheme is still around in 10 years and the personal pension (say) has performed badly? I think I know the answer and so does any IFA who found themselves on the wrong side of the pension review.

This is a serious issue and deserves an airing. Even defined-benefit schemes in trouble should be aiming to provide fair value for everyone and it looks like that might be a greater challenge in future. But to suggest IFAs could be accused of misselling by not recommending that people transfer out of defined-benefit schemes en masse is a step too far.

There is a more pressing issue for IFAs – adding genuine value to corporate and individual clients by leading them carefully through the A-Day labyrinth.

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