Regulations need to be pitched at the right level to incentivise financial advisers to work with DB transfer clients because, says Kim North, if advisers won’t give transfer advice, who will?
With the current need for anyone with more than £30,000 in their defined benefit (DB) scheme to receive regulated advice from a financial adviser, the opportunities for advisers are phenomenal – particularly when you consider private sector scheme assets are at about £1.5 trillion and the local government scheme £233bn.
So while many financial advisers I speak to are not offering DB transfer services as a consequence of the compliance risk and expensive of PI insurance, for those advisers who have squared the circle on both these issues the transfer market offers potential.
More progress needs to be made on the regulatory side, however – particularly in the area of DB transfers, and I have long been of the opinion there needs to be a comprehensive rewrite of the FCA defined benefit pension transfer rules.
At present, the regulations assume an annuity is always bought – which of course is no longer true. The rules covering the comparison of a critical yield and an annuity purchase are also less relevant as it makes no sense to take a DB transfer and buy an annuity as rates are so low.
It is time for those with DB pensions – and it is estimated there are 27.3 million people in the UK who are receiving or will receive a DB scheme pension – to have the same trust given to them as members of defined contribution (DC) pensions through pension freedoms and be allowed to invest their pension money as they wish.
On top of investment freedoms, a combination of factors make DB transfers more attractive to those wanting the best from their retirement income. DB pension transfer values can be as high as 35 times the initial pension and anyone in a funded DB scheme can request a cash equivalent transfer value quotation every year.
More and more DB schemes allow partial transfers, which enables a level of income security while investment growth continues. Indeed, it seems unfair to me that those in DC pension schemes benefit from greater flexibility and better death benefits – as an example, DB schemes cannot pass funds down the generations while DC schemes can. Also, DB members did not benefit from the record stockmarket highs in the form of the FTSE 100’s longest run of all-time highs since its 1984 inception.
Transfer value analysis
On a practical note, the increase in demand for pension transfers means we are also seeing a need for more quality cashflow modelling technology to help plan the given-up annuity income guarantee replacement and for transfer value analysis (TVA) systems, which for years has been dominated by just a handful of providers.
Actuary Nigel Chambers of CTC Software, which developed the original actuarial method for TVA adopted by the regulator in the early 1990s, notes that not only is more technically competent and qualified back-office staff who are able to sign off on transfer information needed to cope with increased demand, but that financial advisers and scheme members/trustees need more TVA system choice.
His point is that trustees have a duty to look after their members’ interests, which mean supporting them by easily evaluating all the options available.
With transfers expected to be in the region of £10bn a year, we are seeing platforms and fund managers offering TVA system services for the first time as they want to attract this huge wall of transfer investment money. But more choice is still needed.
So, while we move towards Brexit and the UK looks towards repealing EU regulations, we need to ensure attention is kept focused on one of the biggest issues affecting millions of people, which is to provide an even playing field for those taking DC and DB pension benefits.
The regulations need to be at the right level to incentivise financial advisers to work with transfer clients and steer those who should take a full transfer, a partial transfer or no transfer, to the right decision.
After all, if financial advisers won’t give transfer advice, who will?
Kim North is managing director of Technology and Technical
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