View more on these topics

Transfer benefits rewards skilled players

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


transfer.


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&#39s 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&#39s 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&#39s 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


benefits.


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


bureau service.


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


correctly.


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&#39s overall


situation.


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


where necessary.


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


investment period.


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.

Recommended

Govt hints it may pay for all elderly nursing care

The Government is considering paying for all nursing care for the elderlyin a move that would allow insurers to slash long-term care premiums by upto half.The industry has given a cautious welcome to remarks by Health SecretaryAlan Milburn who indicated in a speech to the Royal College of Nursing&#39sconference last week that the Government was […]

IFAs caught in the mortgage Cat trap

Intermediaries and lenders believe finalised plans for Cat-markedmortgages have muddied the already murky waters surrounding the role thatIFAs will play in the benchmarked market.Legal & General marketing manager housing market Richard Verdin says: “Igenuinely do not think that IFAs have differential earnings on their mindwhen they are advising on a particular product over another but […]

Aifa&#39s 80/20 vision

When the new single trade body for IFAs was set up last September, itsdream was to give the community a united voice. So how does directorgeneral Paul Smee respond to criticism that it cannot hope to represent theviews both of small and big IFA firms? &#39If you like what it is doing 80 percent of […]

Investec rides on Euro star

Investec Guinness Flight&#39s swoop for former Scottish Widows European fundmanager Albert Morillo is paying off just days after the launch of itsrestructured European funds.Investec and Morillo met leading multi-managers, including Henderson,Lazard and Rothschild, on Friday to promote the funds. The funds have takenmore than £10m, with multi-managers rushing to put them on their buy lists.Many […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment