June 2008

No future surprises

Advisers can add significant value to a client's retirement planning by providing advice on pension transfers.

Currently there are around 69,000 pension schemes in the UK, holding total assets well in excess of £1,000 billion with millions of members needing advice. Essentially, advising on whether or not a client transfers out of their DB scheme should be approached using the same principles employed when considering any kind of financial planning solution. The key question of suitability remains paramount and so the client's situation will be assessed, their attitude to investment risk established and their goals established and outlined. The DB scheme benefits can then be evaluated and a decision made around whether or not it best meets the needs of the client for the future.

Although in assessing the suitability of a DB scheme for a client an adviser will follow their usual planning process, it will undoubtedly throw up very specific issues for the adviser to navigate. To ensure the best advice is given to a client regarding the transfer, an adviser needs to be fully qualified, appropriately authorised by the FSA and up to speed with all the prevailing issues in this field. Any adviser looking to get involved with DB transfers will initially need to consider three key options:

- Are they authorised, qualified and able to provide reviews and advice?

- Can they outsource to a pension transfer specialist as appropriate, with split fees, commission?

- Are they not qualified and do not want to outsource?

I firmly believe option three should be discarded as it would involve the adviser choosing not to evaluate the client's DB scheme in line with their retirement goals.

So what specifically needs to be addressed when considering whether or not a client should remain in an existing scheme, or elect for a transfer?

The starting point should be the scheme itself. A client should be able to obtain all the relevant information from their employer but an adviser will be expected to verify the accuracy of the information provided. Only by having accurate information about the scheme can the right recommendation be made. An adviser is then required by the FSA to produce a full transfer analysis report and this will include:-

- A calculation of the annual rate of growth (critical yield) required to provide equivalent retirement benefits to those in the scheme;

- A comparison of the projected benefits at normal retirement age for the scheme and the potential benefits arising from an alternate investment vehicle;

- A comparison of the projected benefits at early retirement age for the scheme and the potential benefits arising from an alternate investment vehicle;

- The transfer value being offered by the trustees of the scheme.

This needs to be evaluated along with some additional considerations such as;

- How do the projected retirement benefits fit with the client's retirement goals?

- How financially secure is the scheme?

The next logical step would be to look at the alternative solutions. A client may be looking to transfer to another DB scheme, transfer into a defined contribution (DC) scheme, such as a personal pension, or transfer to a buy-out contract. To comfortably recommend a move into one of these solutions an adviser will need to assure the client that the alternative is an appropriate solution to meet their retirement goals. Focus should centre on control, risk, flexibility and consolidation and how the client feels about these.

Control

Is the client expressing a need to exert more control over where his/her retirement fund is invested? This control is not likely to be attainable within a DB scheme, as typically the employer will dictate what is and is not available.

Risk

Is the client comfortable with the risk involved in a retirement solution that is dependent on the performance of the underlying investments?

Flexibility

Do the client's retirement goals make the flexibility of certain retirement options available through DC schemes more suitable than that available through the DB scheme?

Consolidation

Are there benefits to be gained in consolidating a number of DB and DC schemes into one place for the client to better monitor how their retirement planning is going?

Of the millions of people currently in a DB scheme, it's disturbing to consider how many may not be benefiting from a regular review of how suitable the scheme remains as part of their retirement planning.

Nick Bladen
Head of Pensions Marketing
Skandia