I concentrated my attention in that article to the factors relating to charges, past performance and asset allocation.
The latter two of these issues are, in my opinion and experience, the main two drivers for a client’s desire to transfer but in this article I would like to conclude my summary of thoughts on money purchase to money purchase transfers by considering other possible factors.
I will start with one of the most common – and acceptable – reasons for transfers – the desire for consolidation of a number of pension funds accumu-lated over a number of years.
Many people move from employer to employer throughout their working lives and are likely to build up pension benefits within a number of different schemes.
Some of these will have substantial value while others might have relatively nominal worth.
Where these changes of employment or self-employment do not benefit from an employer-sponsored pension scheme, an individual might amass a succession of personal pension policies.
In my own pension transfer firm, I can reveal that the average number of policies per client enquiry is a little under 2.5. This average hides, of course, the significant number of clients with only one pension fund to consider (poor past performance, future asset allocation, etc) but many have two, three or four or more accrued pension schemes to consider.
Consolidation, for many of these people, is the key reason for their desire to transfer – transfer a number of diverse benefits into one convenient replacement pension fund.
As I highlighted in my last article, if this replacement fund benefits from well constructed asset allocation with competitive funds, replacing existing schemes with poor (or non-existing) asset allocation in poorperforming funds, then all the better.
But even those issues do not seem to matter with some consolidation clients, they simply want to tidy up their pension affairs so that, at any time, they can easily identify the value of their existing benefits and perhaps also be able to convert them easily into an expected future level of retirement income.
I know that the FSA is comfortable with consolidation being an acceptable reason for some clients’ desire to transfer their benefits – but within reason. So, let me share with you a very recent example of a client who came to us with six different pension pots.
We cannot be allowed, I am sure we would all agree with the FSA, to transfer all of those seven to a personal pension simply on the grounds of consolidation, without investigating – and bringing to the attention of the client – the advantages and disadvantages of a transfer for each scheme.
This is what happened. I have chosen this (fairly elderly) client because of the diversity of his schemes and the proposition rather than suggesting that he is entirely typical of our enquiries. In fact, we rejected three proposed money-purchase transfers but accepted the other three. The seventh scheme had preserved final-salary benefits. Total equivalent value for all seven schemes was around £500,000.
First the three moneypurchase rejections.
Case number one was easy. It had a transfer value of £20,000 with severe transfer penalties from a fund value of around £28,000.
With only five years remaining to the client’s selected retirement age – at which time the penalties cease – it was not a difficult decision to refuse to help the client to transfer this fund, even on the grounds of consolidation.
If the client had been much younger, I might have given the proposition more thought, especially moving to a properly asset-allocated alternative. But not here.
Case number two was equally easy but for different reasons. A money-purchase scheme with fund valued at around £18,000 with no penalties for a transfer but very attractive guaranteed annuity rates which would be lost on a transfer.
Again, as with the first case, I am convinced that a replacement policy, properly structured, would outperform his existing scheme as regards eventual fund value but, once converted into retirement income, any alternative suggestion that I might have made would not have a prayer of working in the client’s favour. Another “no” recommendation.
Case number three had a transfer value of only £3,000 and was invested in a competitive and well structured with-profits company.
Moreover, the transfer value included, in effect, none of the (fairly substantial, proportionately) terminal bonus and so, bearing in mind the short term of years to vesting date, this had to be a “no go” recommendation.
What then about the other three money-purchase schemes and the final-salary scheme?
Case number four (money purchase) rests with a small to medium-sized occupational scheme with a transfer value of around £180,000.
Although invested with a highly reputable pension provider, the funds were almost entirely directed towards equities. This did not match the client’s attitude to risk, especially bearing in mind this represented a significant part of the client’s overall wealth.
I could have simply recommended a fund transfer within his existing provider but, in addition to the highly inappropriate asset allocation, the client feared that the scheme and the sponsoring company’s future was highly questionable.
It included in its membership three very highly paid controlling directors with promised benefits structured in such a way as to potentially disadvantage the benefits of the poor unfortunates left behind after they take their own benefits.
Case number five (money purchase) was a simple consolidation exercise.
Poor asset allocation, of course (this can generally be taken for granted in our experience) but, again, with a decent product provider. No ongoing advice from the original direct salesperson so this part of the recommendation was relatively easy.
Case number six (money purchase) was more complex as it included six policies, each on different terms, from the same provider.
This particular provider encourages its direct salesforce to effect a new policy each time the client wants to effect an increment or a single-premium addition to his existing policy.
I may be tempted to wonder why this “encour-agement” happens in preference to a simple increment but please do not write in with your suggestions because I am not really so naive.
Anyway, another recommendation to transfer. Consolidation, poor past performance, poor and inappropriate asset allocation and, by the by, high charges.
Finally, then, case number seven – a final-salary scheme. This was not a major proportion of the overall enquiry but the critical yield came back to us at around 10 per cent. With less than five years to retirement? Give me a break. No transfer.
But the commutation factors within the scheme were (not uncommonly) so disadvantageous to this client who required maximum tax-free cash that the true critical yield was much, much lower. Probably a transfer, I suggested, but any doubts I had in my mind were subsequently erased by the client’s “insistent client’ letter requesting this scheme to be transferred also.
Talking about insistent clients, his subsequent letter firmly requested a transfer of benefits from all seven schemes.
What to do? That discussion will start my next article in which I discuss execution-only and insistent clients.
When, for example, might an insistent client for a transfer of pension benefits be acceptable either to the client, the adviser, or the FSA?
Do the answers to these questions differ between final-salary and moneypurchase pension schemes?
If the transfer proceeds, how might or should the file be properly completed and what documentation or communication from the client must or should be required? All interesting stuff, I suggest.