Sourcing low-cost advice for DB-to-DC transfer exercises is fraught with regulatory challenges, says AJ Bell head of platform technical Mike Morrison
One of the main contentious issues since the implementation of the pension reforms in April still seems to be that of DB transfers – there has been a lot written by advisers, providers and even the regulators on this subject.
In the middle of all this, I try to put myself in the position of the consumer/pension scheme member, which is often not easy.
I picked up a pensions magazine the other day – one written for the corporate side of the pensions world and specifically advising trustees and employers as opposed to the retail pension investor. A feature caught my eye with a headline something like ‘How DB to DC can be a win-win for employers and staff’.
This article is not specifically about that feature but explores some of the points raised in it. There was mention of generous transfer values and the trustees of schemes getting to reduce their pension risk and costs. As with any good article on this subject, it mentioned that decisions were difficult and that good advice for the individual was vital.
But the next point made was that employers should be able to negotiate good-quality advice for about £500 per employee. For me this raised a number of questions.
I spent the following days doing roadshows for advisers on a variety of pension issues, with DB transfers being one of the key subjects. I took the opportunity to ask advisers if they would be prepared to give advice on a transfer for £500. You can guess how many said they would.
We then discussed whether we were comparing apples with apples, and concluded that we were probably not. Presumably the advice sourced by the scheme trustee would be restricted to the DB transfer and not be a full retirement service.
But a key question here is: can you really advise on a DB transfer without being aware of the client’s circumstances, other plans and assets? Are we moving back to transactional restricted advice?
That subsequently creates a situation where members of DB schemes are caught in a quandary. On one side is their employer, and pension scheme trustee, perhaps seeking to de-risk by encouraging transfers; and on the other side are the regulators and many independent advisers suggesting that the starting presumption for someone advising on the transaction should be that a transfer is not the right thing to do.
Ultimately, will this sort of situation build confidence in financial advice or cause more confusion? Indeed, many advisers are very cautious in the area, what with the vagaries of insistent clients and the potential scrutiny of the Financial Ombudsman Service, let alone the fear of PI insurers, at the forefront of their minds.
So having taken the £500 package and transferred, would such individuals seek further advice to make sure the transfer was translated into a retirement strategy? Many should and will attempt to do so – but will advisers accept clients who have done a transfer that they may not themselves have advised?
Excuse me for being even more cynical but several advisers have reported numerous occasions where they have been sent forms with the request: “Could you just sign this to say you have given me some advice?” All of them told me they immediately said no – often quoting a substantial fee to deter such requests.
Are we heading to a scenario where even a scheme member who is advised not to transfer can get, at a very low price, a piece of paper that shows they have had advice that will allow a transfer to take place?
The presumption from the regulators has always been of a starting position where a transfer from a DB scheme is probably not in the member’s best interests. But whose interests are these transfer exercise requests representing – sponsoring employer, scheme trustee or scheme member?
Decisions will differ based on circumstances, the size of the CETV and a raft of other factors, and the DB scheme could often be the keystone of retirement planning.
The pension freedoms are a great attraction to many people but must be treated with great caution.