DB pension transfers: presumed “guilty”
unless proven otherwise
The desire to protect people who are making important and irreversible, financial decisions is a laudable one.
A mature and responsible society should have systems to protect the unwary from con-men looking to make a “fast buck” from the gullible. However, such rules also need to be balanced. Overly restrictive rules can just as easily lead to inappropriate decisions regarding pension transfers as overly lax rules, with the consequence that people do not enjoy the flexibility permitted under UK pension law.
-New rules have recently been announced by the FCA, which governs how advice is provided on pension transfers. Some of these new rules came into force on 1 April 2018 whilst others will come into force in October and are certainly not “balanced”. Indeed they are fairly explicit in stating that a pension transfer should be assumed to be unsuitable for the member, unless it can be clearly demonstrated to be otherwise. In a very complex world, proving anything to be better than anything else over the next 40 years will always be a challenge; as such, this “presumption of guilt” will limit financial advisers’ ability to recommend transfers.
It’s not all bad. The new rules are welcome in many regards, as they simplify, harmonise and modernise the previous rules. However, they appear to have been heavily influenced by the pension transfer debacle of the British Steel Pension Scheme. Clearly the scandalous behaviour of certain financial advisers should not have been allowed to happen, but as the old adage goes “hard cases make bad law”.
One particular biased element of the new disclosure requirements is called the “Transfer Value Comparator”, which must be provided in a prescribed format. This comparison arguably takes a “gilt edged” view of pension scheme promises, and compares it with the transfer value being offered. Oddly, this prescribed analysis of the transfer value takes no account of whether the pension scheme benefits might change, for example if the sponsoring employer goes bust. This means a member of one of Carillion’s pension schemes, for example, is likely to have been advised not to take a transfer out, just before the company went into liquidation and the pension benefits were reduced.
Does it matter? Well, in my view we should be looking to increase the availability of high quality financial education and independent financial advisers – these rules make it harder to advise someone to transfer and arguably make it easier to sue a financial adviser, with the benefit of hindsight, down the road. This is unlikely to encourage more access to financial advice.
As such, we are in a world of pensions transfers being presumed “guilty” with no opportunity for a fair “trial”. Those pension scheme members approaching retirement who would find a pension transfer advantageous – which according to the advisers’ rule of thumb is probably around a third of them – will be ill-served by these unbalanced and restrictive new rules.
What should trustees and sponsors do about it? For starters, they could review the basis upon which they are providing transfer values; but more importantly, they should carefully consider how and when they communicate transfer values and other options to members. Only by having a really open, and balanced, communication strategy can we hope to achieve the best outcome for the largest proportion of pension scheme members.
LCP DC Conference 2018
24th April 2018
With millions more saving into pensions across the UK, it’s now more important than ever to explore how we can play a part in helping savers to feel financially secure now and in the future.See the highlights