Retirement planners’ instinctive reaction to the idea of a DB transfer thematic review might be to wince but, says Lee Halpin, if it could bring greater certainty around regulatory good practice, it may be no bad thing.
Looking back at the first few months of 2017, it is clear defined benefit (DB) transfers have been a significant topic in the financial press – and there seems to be little let-up in the number of column inches being devoted to this subject.
The beginning of the year saw the Financial Conduct Authority (FCA) sufficiently concerned to publish an alert setting out some of its expectations relating to pension transfers.
Not taking into account likely expected returns of the assets in which the client’s funds will be invested and recommending pension transfers based solely on whether or not the critical yield is below a certain rate set for assessing transfers generally were both singled out as actions that do not the regulator’s expectations.
But this alert cannot be viewed in isolation, as it also coincides with recent examples of the FCA flexing its muscles. January saw the regulator issue a warning notice to an unidentified individual related to compliance oversight failings as part of an enhanced transfer value exercise involving 700 DB scheme members, while in February it was reported the regulator would conduct a skilled person review at international advice firm deVere related to pension transfers.
This has naturally led to speculation the regulator might not be finished with scrutinising pension transfer advice and may even go as far as commissioning a thematic review on the subject. What is certain is it plans to consult on redress methodology for pension transfers.
What is also clear is the perfect storm of increased defined contribution drawdown flexibility via the introduction of the pension freedom regime and high levels of DB transfer values being offered – which still pale into insignificance when considering the £1.5 trillion of assets held by DB pensions – has led to unprecedented demand for pension transfer advice.
A glimpse of this upturn in demand was given when the regulator published, in April 2016, the results of a survey of a sample of firms providing retail investment advice. This found the total number of requests post-pension freedom had more than doubled (a 123% increase) from existing customers, and had more than tripled (a 246% increase) from new customers, compared with before pension freedom.
While a large cash lump sum may appear seductive over a lifetime income, the truth is that the guaranteed income in retirement will be the suitable option for most individuals.
Exceptions to the rule
As in life, however, there are always exceptions to the rule – ranging from those in the enviable position of not requiring their pension provision to support themselves but who would rather preserve their pension savings for subsequent generations to those possibly in ill-health.
This view was recently echoed by Rory Percival, former technical specialist at the FCA, who stated in a recent blog: “Let’s be clear – there are many occasions when it is suitable to transfer a DB scheme. I have seen many cases where transferring is the right advice. Even transfers with outrageously high critical yields can still be suitable for certain clients. ”
And clearly Prudential believes there are suitable outcomes for clients to be had, having recently announced it had set up a new team to advise on pension transfers
Nevertheless, some advisers still view defined benefit transfers as a minefield and just not worth the risk. Tellingly, 39% and 36% of medium/large and small firms respectively cited uncertainty around present and future regulatory requirements as ‘very important’ barriers to providing mass-market advice.
So while we may first wince at the idea of a thematic review, if it could bring greater certainty around regulatory good practice, it may be no bad thing and may actually address the current imbalance between supply and demand.
Lee Halpin is technical manager at @sipp
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