23 August 2017
In the world of financial advice there is one hot topic which dominates all others – the surge in demand for transfers out of Defined Benefit (DB) pension schemes. Before the advent of ‘pension freedoms’ in April 2015, the volume of transfers was relatively modest. With regulators warning that advisers should start from the assumption that a transfer was not in a member’s interest, many advisory firms simply didn’t take on such work at all.
But in the last two years demand for transfer advice has soared. This is due to a combination of new flexibilities for members who transfer, record high transfer value quotes and a particularly advantageous change to the tax rules for those who want their heirs to inherit any unused part of their pension pot.
In response, the number of adviser firms with the specific authorisation needed to advise on transfers has risen by two thirds in the last two years, but even at this level there are questions about whether the industry has the capacity to provide the volume of high quality advice that is needed. In addition, the FCA has been very active this year in making sure firms are tightening up their processes and several have temporarily suspended their activities whilst they get their house in order.
As part of our joint paper with LCP, due to be published later in August, Royal London recently undertook a survey of more than 800 financial advisers active in this market. Typical transfer values for this sample were in the £250,000 to £500,000 range, and the typical client was being offered a transfer value of 25-30 times their annual pension. By far the biggest reason given for transferring was to take their retirement wealth in a more flexible way than by remaining in their DB scheme.
But one of the striking things highlighted in our joint paper is the wide range of flexibilities open to DB scheme members within the DB scheme. Whether this is taking a reduced pension early, an enhanced pension later or frontloading benefits by exchanging non-statutory inflation increases for a higher starting pension, many of these options would clearly be of interest to scheme members but do not appear to be routinely drawn to their attention.
In terms of improving the system going forward, it is clear that many members would welcome the routine option of a partial DB transfer. This would allow them to use a combination of state pension, partial DB pension and other income sources to provide a guaranteed secure floor in retirement and then to use the balance of their pension rights in a more flexible way. It would also reduce the risk to members (and their advisers) of an all-or-nothing transfer, especially for those with long service in a single scheme.
We also need to see schemes provide systematic and comprehensive information alongside any transfer value quote so that advisers can give proper advice. I appreciate that scheme administrators are swamped with demand and frustrated by repeated requests from advisers for more detailed information. On the other hand, advisers are in many cases terrified of future regulatory intervention asking why the adviser did not look at the full facts of the case. Provision of comprehensive standardised information alongside transfer quotes should streamline the process to the benefit of administrators, advisers and – crucially – the end consumer, who simply cannot understand why it can take the best part of a year to be able to access their pension rights.
I’m delighted to have worked with LCP in the preparation of our joint paper. My hope is that all market participants – from schemes, to advisers, to regulators – can continue to work together to better assist DB members in their retirement decisions, working hard to improve member communications and the help that members are provided with.