20 June 2019
Over two-thirds of DB transfer value advice recommends transferring out
“When advising on Defined Benefit transfers, advisers should start from the position that a transfer is not suitable” is a message the FCA has given repeatedly, but figures published this week appear to show the message has not always been heeded.
The FCA surveyed 3,015 firms of financial advisers, 2,426 of which had provided advice on transferring a DB pension between April 2015 and September 2018. In that period:
- 234,951 scheme members had received advice on transferring a DB pension, with 69% being advised to transfer out and 31% being advised not to
- A further 59,086 members did not proceed to advice after an initial “triage” discussion established that a transfer was not for them
- Of those members advised not to transfer, 13% did so anyway as “insistent clients” - 620 firms facilitate transfers for insistent clients
- 60% of the firms providing transfer advice during this period had recommended 75% or more of their clients to transfer
- The total value advised upon was £82.8bn, around 5% of the £1.57trn in DB schemes eligible for the PPF (as at March 2018)
The FCA is reacting to these figures, which have built upon a number of the reviews it has carried out recently (see Pensions Bulletin 2019/06), by writing to all firms that have been identified as causing potential harm with their DB pension transfer advice and setting out expectations of the actions those firms should take. The FCA will also be directly assessing the most active firms throughout the remainder of 2019.
Good advisers will seek to understand a member’s objectives and subsequently advise on how best to achieve those objectives – which may well be by not transferring at all.
It may be that the high proportion of advice to transfer out is largely due to advice given earlier in the survey period – at least one would hope the more recent advice has started to heed the messages.
It does appear that the FCA has obtained a substantial amount of information on the topic and is able to pinpoint those advisers who might be advising members to transfer more freely than intended.
Open letter from the GMP Equalisation Working Group
The cross industry GMP Equalisation Working Group (GMPEWG), launched in January (see Pensions Bulletin 2019/02), has published an open letter outlining its plans for “the vital good practice guidance needed to help this complex process”. The letter details its current areas of focus and the five sub-committees (Methodology, Impacted transactions, Data, Tax, and Reconciliation & Rectification) which are working on producing guidance in each area.
The GMPEWG aims to produce a call to action covering the early stages of equalisation projects by the end of this month, with first versions of some of the good practice guidance targeted for the end of September. Updates to the guidance will be provided as industry thinking develops and clarity is received in certain areas.
The open letter notes how the GMPEWG will interact with two other working groups in this area:
- The group working with the DWP on GMP conversion guidance (the first edition was issued earlier this year - see Pensions Bulletin 2019/16) and potential changes to GMP conversion legislation
- The group set up by HMRC focussing on the pensions taxation issues that arise as part of implementing equalisation for unequal GMPs by whichever method is used (see Pensions Bulletin 2019/13)
The GMPEWG is not seeking to replicate the work being undertaken by these specialist groups, but instead to work closely with them to provide support and where appropriate to reference their output in GMPEWG guidance.
The existence of these groups has been public knowledge for some time and the open letter gives helpful clarity on how they fit together. The whole area of equalising benefits to allow for unequal GMPs is potentially wide-reaching and complicated, albeit that for many members the changed outcome may be small. The prospect of collaboratively-produced good practice industry guidance to support schemes in preparing for and then implementing the changes is welcome but the timescales are ambitious.
Divorce, Dissolution and Separation Bill signals the end of the divorce “blame game”
The Bill makes important changes to the legal process for married couples to obtain a divorce, for civil partners to dissolve their civil partnership, or for obtaining a judicial separation. It also updates the terminology used, for example, replacing terms such as "decree nisi", "decree absolute" and "petitioner" with "conditional order", "final order" and "applicant".
In particular, the Bill amends the Matrimonial Causes Act 1973 and the Civil Partnership Act 2004 to:
- Replace the requirement to prove either one of the three conduct “facts” (adultery, “unreasonable behaviour” or desertion) or either of the two separation ‘facts’ (two years if both spouses consent to the divorce, five years otherwise) with a requirement to file a statement of irretrievable breakdown of the marriage (couples can opt to make this a joint statement)
- Remove the possibility of contesting the decision to divorce, as a statement will be conclusive evidence that the marriage has broken down irretrievably; and
- Introduce a new minimum period of 20 weeks from the start of proceedings to “conditional order” stage. Added to the existing six weeks between the conditional order and the final order, the new minimum timeframe for a divorce will be six months
The Bill is expected to come into force by commencement order after Royal Assent and the main provisions will only apply to England and Wales.
The current legal process for divorce incentivises spouses to make allegations about each other in order to speed up a divorce based on a “separation fact”. This Bill aims to make divorce less acrimonious and provide better support for couples to move forward as constructively as possible. Pension schemes may need to anticipate an increase in requests for divorce information and transfer calculations once the Bill has been enacted and will also need to review scheme documentation and member communications to reflect the new terminology.
LGPS valuation results are fast approaching - what should you do to prepare?
The 31 March 2019 triennial valuation of the 89 Funds of the Local Government Pension Scheme (LGPS) in England and Wales is underway. Whilst timescales will vary by Fund, results are generally expected by September/October with any new contribution requirements coming into effect from 1 April 2020.
It is hard to predict this time’s results for a particular employer, as it depends on many factors, not least the funding level of the Fund and the nature of the relevant employer.
We expect there to be some good news (assets have performed well and slowing life expectancies should reduce deficits) and some bad news (lower expected future investment returns placing a higher value on liabilities) – as well as some unknowns (unresolved court cases and the “cost cap mechanism” potentially affecting member benefits).
It is worth alerting Boards to the timescales involved and understanding the wider options available to your individual organisation. These could include:
- Paying a lump sum to reduce future contributions (this may just be a cashflow change, but sometimes there can be a discount for early payment)
- Offering contingent security to the LGPS Fund in exchange for lower contributions
- Moving to an alternative (non-LGPS) master trust offering Defined Benefits; and
- In some cases, it may be possible to move to an alternative benefit structure outside of the LGPS (eg Hybrid, Defined Contribution, Collective DC and others)
Boards should be alerted to the timescales and ideally consider whether they wish to look at options to reduce contributions and or pensions risk.
It will take time to consider the options available and the implications for your organisation, so it is worth getting this on Boards’ agendas now.
Our News Alert 2019/05 provides further details.
DC VAT regulations update
We reported on regulations to “onshore” EU VAT law as it affects defined contribution pension management costs post-Brexit in Pensions Bulletin 2019/03. These regulations are now to be revoked with effect from 8 July 2019. However, the Government’s intention is for the provisions in the revoked regulations to be re-introduced in another instrument which is expected to come into force on 1 April 2020.
This seems to be just housekeeping by the Treasury and, assuming that the regulation provisions are reintroduced as intended then we should arrive at the same landing for VAT treatment of DC pension management costs after the UK leaves the EU.
UK retirees outlive their savings by a decade
Research by the World Economic Forum suggests that the average UK retiree might use up all their pension savings at a point when they still have more than ten years left to live. However, whilst this is clearly not a desirable situation, the scenario is very similar in other countries with developed pension systems and even worse in Japan (where savings are expected to be exhausted when the member has between 15 and 20 years left to live).
The research, published in a white paper titled “Investing in (and for) Our Future”, suggests that average pension savings in the UK are sufficient to cover less than 9 years’ worth of members taking a pension of 70% of their final pay. That leaves an average of between 10 and 13 years of life after the retirement savings have been used up.
The paper also discusses how countries have implemented accumulation and decumulation strategies and tips for investing in alternatives.
Whilst the headline is concerning and there is no doubt many people should be saving more for their retirement, in reality not many will be expecting an income of as much as 70% of their final pay in retirement. Whether they are expecting as little as around 30% of their final pay is a different matter!
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.