I recently did five roadshows around the country with the AJ Bell Investcentre team, covering a number of issues from the new pension freedom regime.
One of these was the always thorny topic of transfers from defined benefit (DB) schemes to defined contribution (DC) arrangements (self-invested personal pensions or personal pensions included).
We have had some guidance from The Pensions Regulator (TPR) with its ‘DB to DC transfers and conversions’ and from the Financial Conduct Authority (FCA) with its ‘Proposed changes to our pension transfer rules’ (CP15/7).
The TPR consultation contains useful information for the trustees of DB pension schemes and the new process.
A couple of things particularly caught my eye: “Trustees have a duty to act in the members’ best interests”, and they must “balance the interests of both the members wishing to exercise their right to transfer with those that wish to remain in the scheme”.
The consultation also confirms that all the trustees have to do to meet the new advice requirement is to receive confirmation that the member has taken advice from a qualified adviser – the outcome of the advice or the advice itself is nothing to concern them.
The FCA’s consultation sets out its stall like this
“Our general presumption – reflected in our COBS – is that transfers from DB schemes to DC
arrangements are unlikely to be in consumers’ best interests. However, we accept that there
may be a limited number of circumstances where a valid case for transferring can be made, e.g. where a consumer has limited life expectancy.”
To this, you could add a number of other circumstances:
• Flexibility to retire before normal retirement date (NRD)
• Provision for other beneficiaries, not just spouse
• Do you need full pension at prescribed NRD?
• Why wait until NRD for PCLS?
• Death benefits for future generations
• Investment control
If there has been one factor that has stood out it has been the fact that the cash equivalent transfer value (CETV) quoted is higher than it has been in the past and might never be as high again in the future.
The other thing that is changing with this consultation is the intention to also cover ‘at-retirement’ transfers.
Many of the enquiries that have come my way have been from advisers who either do not do DB transfers at all or rarely do due to compliance requirements. The transfers have tended to be at the higher end of the spectrum (£500,000 plus, with many over £1m).
Many of the advisers have said to me that they know they have to walk away or refer the transfer to someone who can advise (but who the client does not know or want as their adviser).
They have then pointed out to me that, in many cases, the clients will do the transfers anyway, even if the advice suggests not – the qualitative issues will outweigh the quantitative issues and the clients involved will attach more weight to these than on a critical yield.
Again we are fostering an exclusive regime when it is perhaps time to change to an inclusive one – surely it is better to have such individuals in an advice regime rather than outside it?
The FCA paper suggests that there could be some additional 3,000 to 6,000 transfers, which could lead to ‘material consumer detriment’, and there is reference to ‘irrational’ consumers.
We know that consumers can be ‘irrational’ – the preponderance of behavioural research confirms this.
I suggest we need a bit of a wider rethink – surely it is better to get all such clients into an advice regime?
And if some clients do make irrational decisions, then again surely it is better for this to be done in that advice relationship in order to mitigate the ‘material consumer detriment’ – the detriment is not necessarily just the transfer, it is also what the client does afterwards.
The policy philosophy backing pension freedom is to give people choice, but also to provide them with the support to understand the implications of their actions – surely this should be replicated in this particular area?
Mike Morrison is head of platform marketing at AJ Bell