In the current financial world of super-regulation, few areas have come
under closer scrutiny than the pension transfer market. The reality
nowadays is that many pension advisers are reluctant to become involved in
the analysis of preserved pension benefits, choosing instead to focus time
and energy on other areas of expertise which they feel could be more
remunerative or less risky in compliance terms.
However, if a pension adviser does not offer at least the facility for
advice on preserved pensions, then clients may become a target for other
firms. Additionally, a discernible lack of advice may ultimately be
construed as bad advice in certain cases.
There are many issues which face firms which remain active in analysing
preserved benefits. A recent ruling by the Pensions Ombudsman has very
significant implications for the possible equalisation of guaranteed
minimum pensions (GMPs) alth- ough the case is being taken to appeal and
the issue has still finally to be resolved.
In the meantime, however, many scheme trustees are adopting a wait and see
approach. This has resulted in a number of intended transfer cases being
delayed because the receiving pension scheme is unwilling to accept the
Commonly, the ceding scheme is being asked to provide an appropriate
undertaking with regard to the equalisation of GMPs or alternatively that
any imbalance may subsequently be made good by the ceding scheme.
Advisers must make clients aware of the effect of GMP equalisation when
reviewing the options open to them in the reasons-why report.
Information gathering is critical. The two main strands here are the
fact-finding exercise with the client and the preserved benefit information
obtained from the trustees of the ex-employer's scheme.
Obviously, transfer-out statements and preserved benefit statements are
the primary sources of sch-eme information. Typically, however, these are
never enough on their own to provide sufficiently comprehensive answers to
enable a set of accurate and meaningful recommendations to be made.
Death benefits for dependants are one specific area that usually needs to
be explored further. It would be regrettable, for instance, if an adviser
recommended that a seriously ill client should not transfer because of the
perceived generous death benefits under the existing scheme.
It would be even more unsatisfactory if the client's widow subsequently
discovered she was only entitled to significantly smaller benefits because
she was not married to the member during his period of active membership.
A recent survey of private sector pension schemes carried out by the
Rainbow Research Project suggests that, while progress is being made in
pension scheme provisions for unmarried heterosexual couples, some schemes
still fail to state clear policies towards same-sex partners.
Significantly, the public sector in particular seems less progressive,
with many superannuation schemes failing to recognise same-sex partners.
Although, in itself, the death benefit provision is unlikely to be the
only reason to recommend retaining preserved benefits or to transfer, it
may turn out to be of crucial significance and therefore cannot be dealt
with only superficially.
One of the more obvious points which also often requires further
clarification is the maximum tax-free cash figure. This applies whether it
is scheme maximum or Inland Revenue maximum together and has to be
considered along with the associated point of recording the member's total
remuneration, including P11D benefits where possible. Less straightforward
sometimes are enquiries about any surplus position and whether there are
any impending changes to the scheme and how these may affect preserved
The adviser is ultimately responsible for the accuracy and
comprehensiveness of all information gathered and upon which the subsequent
transfer value analysis system (TVAS) is based, even where the information
gathering has been delegated to a third party, be it insurance company or
Often, when an adviser uses an insurer-linked service, the insurer also
provides the TVAS.
Presumably, if the adviser is independent, it will also arrange for
several pension providers to run a TVAS for comparison purposes. Herein
lies one of the biggest potential problems as the adviser is clearly
reliant upon different insurers to interpret the same scheme information.
However good the TVAS system is, it will serve little use if the personnel
lack the appropriate skill and expertise to validate data and input
When it comes to information gathering with the client, hard facts are not
the only issue. It will also be necessary to gather other information such
as attitude to risk, early retirement, preference for retaining guarantees
and the importance of death benefits – all specifically related to the
preserved benefits in question but viewed in light of the client's overall
Conflicting priorities very often arise in this section of the fact-find
process and ultimately the counselling skill of the adviser can help the
client arrive at the final decision.
Priorities often change when a client understands the meaning of terms
that advisers use daily. This has implications for the validity of any
reasons-why report that should, of course, state upon what basis the
recommendations have been made.
The reasons-why report should also detail the responses that the client
gave in the first instance so the client may reappraise responses in light
of more detailed information and the recommendation should be revisited
Although the critical yield is not the only factor in determining whether
a transfer should go ahead or not, there is no doubt that it is a focal
point for many clients in the decision of whether or not to transfer. The
expected return looms large among factors determining choice.
However, returns are obviously dependent on the investment risk that the
client is prepared to take and the length of time available for investment.
Rather than just rely on one cut-off point it seems sensible to construct
a matrix of critical-yield thresholds, governed by attitude to risk and
The effect of charges on the overall return will be more significant on
shorter terms and should therefore always form part of the equation.
There are obviously occasions where transfers do go ahead on a personal
contract even though the critical yield is higher than the stated
threshold. This is most usually due to subjective factors that have been
given greater priority. But the main purpose of the matrix is to enable a
measure of guidance on assessing what is likely to be an achievable rate of
return in the future.
Advising on preserved benefits is never likely to return to mainstream
business activity for the general practitioner adviser but for those
willing to specialise in this area of the marketplace it can be a
challenging and rewarding source of business.