The level of debate stirred up by defined benefit transfers shows no sign of abating, both within the advice profession and across the wider pensions industry.
Demand among savers has been driven by the high transfer values on offer, and has been compounded by worries over the health of certain pension schemes following high profile collapses such as BHS. Regulators and policymakers are sitting up and taking notice.
The experience of steelworkers following the restructure of the £15bn British Steel Pension Scheme is a case in point. Advisers have reportedly been overwhelmed with enquiries for DB transfer advice from workers affected, with advisers having to turn scheme members away. The FCA has recently held training seminars for advisers in Swansea and Doncaster to discuss its expectations around DB transfer advice.
DB transfers are also being examined by MPs as part of the Work and Pensions committee’s ongoing inquiry into pension freedoms.
Against that backdrop, it is worth analysing the DB transfer market as it stands, as well as what’s to be gleaned from the FCA’s latest findings on the suitability of transfer advice. Most importantly, how should advisers navigate the minefield of DB transfer advice, while ensuring the best outcomes for their clients?
State of the market
At a recent Illuminate roundtable debate, advisers and pension specialists came together to discuss their experience of the DB transfer market, and the challenges associated with this controversial area of advice.
Tuto director Tim Eadon is a pension transfer specialist whose firm acts as a bureau service for advisers. He said his firm typically gets five to six enquiries a day requesting advice on DB transfers.
He said: “We are very much at the sharp end, but there is an ever-growing number of enquiries. People are just far much more aware. You tend to find a trend happens when, for instance, someone comes from British Steel. Then they go and tell somebody else, and then somebody else comes from British Steel, and so on. We’re getting more and more people from particular sectors.”
Nucleus product technical manager Rachel Vahey agreed demand has been fuelled by pension savers themselves. She said: “It’s the growth of canteen chatter. Where people leave an industry or a particular business, they talk to people they used to work with and they exchange all their stories. It’s a topic of conversation: ‘What have you done with your DB scheme? Have you changed it? Have you moved it? Have you seen this financial adviser?’ It’s that groundswell that is driving the number of transfer enquiries higher and higher.”Technical Connection head of pensions strategy Claire Trott argued as advisers are approached more about DB transfers, there are risks both with giving advice as well as avoiding the market altogether.
She said: “I don’t think advisers can ignore it now. There is also a lot of noise in national newspapers, with big names backing transfers and making out that pension freedoms are great. People automatically think a transfer is the right thing to do.
“Saying ‘I’m not doing this advice full stop’ could come back to bite advisers later, if a client dies and their partner questions why they don’t have death benefits. That is another risk of not doing it, versus assessing the situation properly and doing a full advice process, whether the advice is to transfer or not to transfer.”
Vahey pointed out it is hard to quantify the exact number of DB transfers being carried out as the FCA isn’t going to start collecting data on this until next year. She said recent estimates suggested there have been 120,000 DB transfers this year, but added this is likely to be scratching the surface given the Pension Protection Fund puts the number of deferred DB members at over 5 million.
Personal Finance Society director of policy and engagement Matthew Connell said: “The amount of transfers is the tip of the iceberg, because for every transfer carried out there are other clients who have been advised not to transfer. The actual number of people who are being advised is even bigger.
“Our good practice guide to DB transfers has been downloaded thousands of times, so it’s definitely something that’s at the front of advisers’ minds. Our approach is to list out the pros and cons and make it clear that the process needs to look at things holistically. Advisers have to understand the risks involved, but it is an advice process like any other, and pension transfer advice has to be looked at in the round.”
The FCA view
In October the FCA released the findings of a two-year review into DB transfer business. Based on 88 recommendations to transfer across 13 firms, the regulator found that 47 per cent of files reviewed were suitable, 17 per cent were unsuitable and in 36 per cent of cases it was unclear whether the recommendation was suitable or not. Following the FCA’s work, four firms have stopped advising on DB transfers. The regulator says it plans to continue to monitor the market, and will start a further phase of supervision assessments in the coming months.
Grayside Financial Services managing director Mike Seddon said it is hard to know what to take from the FCA’s findings given the small sample size. He said: “It was quite a narrow review. It’d be interesting to see what would happen if the FCA was to widen that review, and whether that would change the percentage of unsuitable advice. Also, the proportion of cases where it was unclear whether advice was suitable was quite high. That doesn’t really tell you too much.”
Connell suggested the regulator was not saying its findings reflected the wider advice market, but that these are the kind of poor consumer outcomes to be expected where firms take shortcuts and cut corners with the transfer advice process.
Trott said the FCA was clearly focused on the suitability of underlying investments as well as the transfer itself.
She said: “The whole thing needs to be stitched together into one comprehensive piece of advice. The different parties need to talk to each other, so where there is the original adviser and a bureau service they need to ensure the end result is one comprehensive personal recommendation.
“It’s okay to use different people in the process, as long as everyone’s talking to each other. They all have to be in agreement that the recommendation is in the client’s best interest, and that what they’re investing in is suitable for them.”
"The government then literally opened up this whole market, without the product set really changing at all. A whole host of people have been thrown into this investment quagmire and been left thinking: ‘I really don’t understand what on earth is going on.’"
Eadon argued the changing dynamics of the market due to pension freedoms has meant there is a real risk of clients not understanding the consequences of a transfer.
He said: “Pre-freedoms, a small percentage of your business might have drawdown cases, typically for high-net-worth clients and sophisticated investors. The government then literally opened up this whole market, without the product set really changing at all. A whole host of people have been thrown into this investment quagmire and been left thinking: ‘I really don’t understand what on earth is going on.’
“That, for me, is part of the fear. Do clients properly understand the investment element, and the fact they are coming from a guaranteed space and going into something which is clearly no longer guaranteed? Are the investments appropriate? Are they working for them? Do they even understand them? That’s going to be part of the problem.”
Eadon predicted the situation is likely to come to a head when the stockmarkets fall and those who have transferred out of a DB scheme and started accessing their pot realise they could run out of money in retirement.
He said: “Annual reviews are just so more important than perhaps they ever used to be. With an annuity client, you go back every 12 months and the service hasn’t really changed because they’ve still got what they’ve always had. Drawdown changes that completely. The real crux is going to be in the reviews.”
Seddon agreed. He said: “For DB transfers going into drawdown, it is absolutely critical that clients are engaging with their adviser, on at least an annual basis.”
Grayside carries out pension transfer advice itself through its in-house specialists. But Seddon said for those firms that choose to outsource, a lot will depend on the specific part of the advice being outsourced, for example whether it is the transaction that is being outsourced or just part of the transfer analysis.
Vahey noted due diligence on pension transfer specialists was key. She said: “This is two sides of the same coin. You’re working together for the client’s benefit. It’s about making sure your business ethos matches up with their’s, not just making sure they are following the rules. Advisers need to ensure they are on the same page with the specialist, both in terms of business development and the treatment of the client.”
£30,000, and the need for guidance
Advisers will be aware of the requirement for consumers to take advice where a proposed transfer involves a DB pension or other safeguarded benefits worth more than £30,000. In practice, this has led to headlines about savers being ‘forced’ to take advice and ‘wasting money’ on advice related to pension transfers. Concerns have also been raised on the impact of advice charges for those with relatively small pension pots.
Eadon said in his experience the £30,000 threshold for advice was “illusory”, as increasingly pension scheme trustees are insisting members take advice for pension pots of less than £30,000.
Connell argued rather than raising the advice requirement from £30,000, policymakers should first put in place better guidance to help those with smaller pots.
He said: “Looking at pension freedoms as a whole, our feeling is the dial is still towards too much risk being taken on by consumers making their own decisions. The first step is designing a system so there is more default guidance.
“When you look at the issues involved, such as sequencing risk, running out of money and the lifetime allowance, throw any one of those factors into the mix and suddenly the whole thing is turned upside down.”
Connell added: “From a public policy point of view, what we’d like to see first is more people getting guidance, rather than racing straight to raising the £30,000 cap. At that point, if there’s evidence mounting that there’s a particular group of people who are paying for advice when they shouldn’t, then look at raising the cap at that stage.”
Vahey agreed increasing the advice requirement was not the answer, and that the focus needed to be on evidencing client understanding.
She said: “Perhaps we need a solution for people who’ve received guidance to say they’ve understood what they are doing. This could be getting people to read something, and sign a statement saying they understand, and that the risks have been explained to them.”Next week: What should advisers do next on DB transfer advice?