Since the start of the year, talk of defined benefit (DB) transfers has dominated the financial press and there appears little let up in the number of column inches or server space being devoted to this subject.
We know what has driven the unprecedented demand for pension transfers - a perfect storm of increased defined contribution (DC) drawdown and death benefit flexibility via the introduction of the pensions freedoms regime combined with record high levels of DB transfer values being offered.
Nevertheless, some financial advisers still view DB transfers as a minefield that is not worth any of the potential regulatory, financial or reputational risks.
To put some context around the issue of regulatory uncertainty, let’s consider that over a third of firms cited uncertainty around present and future regulatory requirements as being a barrier to providing mass-market advice.
What causes such uncertainty? Assessing the suitability of a pension transfer from a DB to a DC scheme requires an adviser to adopt a methodology that assumes a subsequent annuity purchase, now unlikely to be the retirement product of choice for those considering a transfer to access the pension freedoms. Moreover, an adviser recommending such a transfer must show it is in the client’s best interests and importantly start with the assumption that the transfer is unsuitable.
In fact, one could argue that the current regulatory approach is incompatible with the concept of pension freedoms and that a more subjective judgement that considers the client’s desire, lifestyle aspirations and well-being is required.
This argument certainly resonates more with the Government’s rationale for going ahead with the reforms in the first place. In response to a related consultation it stated: “There was a broad consensus that individuals who have been responsible and saved for their future should be trusted to access their pension savings in a way that most suits them”.
Yet, three years have passed since the radical pension freedom reforms of the 2014 Budget with the changes having been in place for the last two years. Why has such regulatory uncertainty been allowed to fester? Surely this could lead to poorer outcomes, such as demand continuing to outstrip supply or, worse still, consumer detriment.
That is not to say that there has been no regulatory steer whatsoever. At the beginning of the year, the regulator was sufficiently concerned to publish an alert advising some of its expectations relating to pension transfers. This singled out failing to consider expected returns of the assets in which the client’s funds will be invested and recommending pension transfers based solely on whether the critical yield is below a certain rate set for assessing transfers generally.
The above is, however, just the tip of the iceberg and greater certainty is needed. Hopefully this is finally on the horizon, with the regulator announcing that it expects to publish a consultation paper on advising on safeguarded benefits, such as those provided by a DB scheme. Let’s not be too downbeat about the fact that the regulator has only committed to the consultation occurring “in due course”. Baby steps springs to mind.
Besides greater regulatory focus, there is also a need for a shift in thinking around retirement. While most savers would agree that a sizeable cash lump sum may hold more appeal than a lifetime income, the reality is that guaranteed income in retirement will be a more suitable option for most individuals.
There are exceptions, as was highlighted Rory Percival, former technical specialist at the Financial Conduct Authority, 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.”
But for advisers to have a similar degree of certainty relies on a clear understanding of the regulator’s expectations specific to the post-pension freedom environment. Only then will more advisers be prepared to tackle pension transfers with confidence. More advisers to choose from and more consistent advice is surely a win-win for consumers. Let’s just hope the timescale is sooner rather than later.
Eddie McGuire is managing director of @sipp.
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