Among the avalanche of ‘terms of reference’, consultation papers and policy statements coming from the FCA this summer (a little light reading for the train to Cornwall on this Friday’s staycation weekend!) is CP 17/16: Advising on pension transfers.
The current conduct of business rules explicitly state that advisers should start from the assumption that a transfer is not in the individual’s best interests. This consultation suggests a prospective volte-face from the regulator.
The FCA’s proposals include replacing the transfer value analysis (TVAS) report with APTA (appropriate pension transfer analysis). This would go beyond looking at the pure transfer value to make advisers demonstrate to clients in financial terms the benefits they would be giving up. Quite rightly the FCA does not believe that consumers understand the concept of the ‘critical yield’ (the investment return needed from the DC pension fund to equal the income from the DB scheme).
It’s no surprise that DB transfers are on the FCA’s radar given the volume of assets in transit. Over the last 18 months there has been a DB to DC transfer gold rush, as one platform put it to us.
We are sceptical, however, that longer term demand for DB transfers is just related to the current ultra high transfer values and many advisers that we have spoken to agree.
Many transfer specialists see this as a long term market and objectively transferring out of a DB scheme at retirement has always made sense for some clients, for example where the DB member:
- Has no spouse to benefit from the mandatory residual spouse’s income (normally 50%).
- Is in very poor health and so will not benefit from the lifetime income guarantee.
The pension freedoms also made pension benefits inheritable. One DB transfer specialist told us “We write five DB to DC transfers a day….The biggest change is the death benefit.”
Malcolm Small, now of Copia and formerly of TISA, has also raised with us the very real risk of DB scheme underfunding for some DB scheme members. Malcolm believes that in many cases DB to DC transfers are demand-led by the customer.
Our conversations for Platforum’s Advice in Decumulation report suggest that advisers have mostly formulated a clear strategy for clients seeking DB to DC transfer advice, and whether they want to advise on them or not. Advisers are acutely aware that without a clear policy and process they risk future referrals to the FOS.
Firms without the necessary permissions to offer the service themselves are outsourcing or referring clients to specialists – although some of these specialists have proved to be problematic.
Processes, checks and balances are vital. Perhaps for this reason, we find that larger firms are both more likely to advise on DB to DC transfers and to see this area of advice as a growth area.
Larger firms have larger compliance teams and greater standardisation of processes, which could mean that they are more confident about managing their liabilities.
Commentators might have us believe that it really is the Wild West out there with ample scope for cowboys offering inappropriate advice. There are still some horror stories out there: one adviser told us of a case where the client was charged £30,000 on a fund with a transfer value of £250,000 – with the assets then invested in an obscure fund.
But despite some of the headlines, the industry has not stood still: many advisers have thought long and hard about how to approach DB to DC transfers to protect the client’s interest. This is a market where there is a legitimate consumer demand and a need for transfers for some DB scheme holders, a need that only advisers can help investors meet.