I see defined benefit transfers as a major risk to come, and as a firm we have developed our process for dealing with those looking to transfer out to be deliberately low-risk.
I would stress this is all based on our own opinion, and I am aware I’m being very black and white on a topic where there are shades of grey.
Despite coverage in the press suggesting otherwise, the FCA's latest consultation on advising on pension transfers restates that the transfer of safeguarded benefits is likely not to be in the client's best interests. The only subtle change is that the regulator is proposing the removal of the presumption that is the case. My view is if a transfer is unlikely to be suitable, there's nothing in the FCA's consultation that would suddenly make it suitable.
The starting point is a telephone call where we tell clients we’ll bear the cost of this initial discussion to help you learn more about your benefits, understand whether you want to work with us and, importantly, whether we want to work with you.
What we start with is not a script, but a set of questions to get at the person’s motivations for transferring. The first question is about understanding their objectives. We ask them to tell us in their own words why are they wanting to transfer. All calls are on a recorded line, but we also write down the words they use as we come back to this later in the process to try and challenge these perceived objectives.
We then tell people about some of the deadlines involved. Of course, we are working within the three-month guaranteed period attached to transfer values, and we often find people have had the information for between eight and 10 weeks before they come to us.
An important part of this initial conversation is understanding their other assets. It’s certainly not a full fact-find, but in light of their stated objectives what we’re trying to get out of them at this point is are there other assets they could use instead?
On charges, we explain our fees are not contingent on the transfer and we expect clients to pay these personally. Even if the advice is to transfer out, our fees are not deducted from the pension. This is a deliberate strategy on our part to make it clear to an individual that if this advice is looked at in the future, there’s no suggestion they wouldn’t be charged for the work or that we were going to get paid from the product. Fees for the transfer analysis are paid irrespective of whether the advice is to transfer out or not to transfer.
Part of our advice process is to build a cashflow plan. We’re not looking to give transfer advice in isolation, but as part of a long-term advice process, bearing in mind a client’s financial objectives and where the pension fits into that. We don’t want consumers to see advice as a tick box exercise.
The analogy I use is a doctor who thinks a prescription is against a patient’s best interests; they wouldn’t leave a blank signed prescription on the desk for the patient to fill out. Effectively, if an adviser gives the advice not to transfer, that is the equivalent of that blank prescription. We make it very clear if the advice is to stay put, we will have no further dealings with that client: we don’t believe in insistent clients and don’t believe the concept exists.
We explain how a transfer value analysis works, and tell clients that we will look at the transfer value that’s on offer and how they might meet those benefits under a similar arrangement.
What I’m trying to say to people is they’ve expressed reasons why they think they should transfer out, and I want to give them other ways of achieving their objectives. If there is a way I think they can achieve those objectives without transferring out of a final salary scheme, and giving up safeguarded benefits, then that’s what I think they should do. Because my thinking is: most people are better off in a final salary scheme.
An important factor people overlook is the lifetime allowance. A scheme pension is assessed at 20 times the provided pension for the lifetime allowance. Even if you managed to grow your benefits to the level that you’d need to in order to match the benefits of the old scheme, in many cases you would have a massively greater lifetime allowance test. That means not only is the critical yield unlikely to be achievable, but there’ll be an up to 25 per cent haircut on the critical yield. That means you are having to work even harder just to match the benefits that are provided by the old scheme.
Another issue is solvency, which is not one that advisers can really assess. Advisers do not have a crystal ball. Whether you advise to transfer out of a scheme that is struggling, or if you give advice to stay put, there will be ambulance chasers in five to 10 years’ time questioning the advice.
For me, the million dollar question to ask clients is: why are you not most people? There’s also a follow-up question which comes in two parts. The first part is: if the advice is to transfer out of your final salary scheme, what will you do? And the second part is: if the advice is not to transfer, what do you do? Listen to the answers and write them down.
What we’re really concerned about is the answer to that second question. If the answer comes back as: “Whatever you say, I’m going to transfer out”, at that point in the conversation a red light goes off and we immediately stop dealing with that person. We don’t want people that see this as a box-ticking exercise. It’s not good for us, because ultimately we want clients that value the advice we’re giving. It’s not good for the client either if they are wanting us to rubberstamp something we believe is not in their interests.
Hopefully after going through this process, consumers understand their benefits better. And while it may seem as if I’m being overly negative, if we’ve successfully highlighted some of the reasons they may not want to transfer and explained to them what they have, often it leads to other areas the client wants advice on. Clients value our candour on this.
Above all what we are doing is educating people, and for our benefit, screening people. It’s not advice, and we don’t do rules of thumb. These are extremely dangerous in my view. If the multiple appears to be high, why does that matter? There's often technical reasons like lots of 8.5 per cent GMP or high levels of guaranteed revaluation.
In more cases than not, we are declining to advise. What I say to people is, nobody ever got to retirement and said: “I wish I had less guaranteed income."
If after all of that, we think there is a good case for why someone should transfer, there is board approval sign-off before we get signed client agreements and take them on for the next stage of work. We record everything, for those who go to the transfer advice stage, and importantly, those who don’t. When our professional indemnity insurer comes around to ask us how many people we advised to transfer out we can give them a list, but we can also provide details of the people we turned away.This article is written from a presentation given by Alistair Cunningham at the Personal Finance Society Festival of Financial Planning.