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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


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


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


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


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.


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