LV=’s Retirement Wizard robo advice proposition is dealing with significant numbers of scheme members considering DB transfers. LV= director of sales and marketing Steve Lewis talks to John Greenwood about the perils of workplace groupthink and whether trustees should be offering tax-free cash on a factor of 12 when total transfers are on a factor of 35?
CA. Could trustees face legal challenge for not making it sufficiently clear to members, particularly those in poor health, that they could have had a transfer and increased their death benefits significantly?
SL. The trustee can argue ‘it is my responsibility to provide them with a final salary pension, and it does not say on the deed that my duties are to present someone with all of their options at retirement and counsel them through those options and get them to do a health assessment’.The counterbalance to that is the risk that the trustees’ omissions will steer people in a particular direction. One’s unconscious behaviour is often as influencing as one’s conscious behaviour. So the things trustees do not say can be as important as the things they do say. Not telling them about the options is a strong message, and that is dangerous.
CA. Are there any other risks to trustees?
SL. Yes. The other dangerous issue for trustees is the conversion factors for tax-free cash. For final salary it is often 12 or 15 times. So you are transferring a significant chunk of your money into cash, but your conversion rate is 12 or 15 times, whereas if you transferred the pension you might get 30 or 40 times.
People historically have said they want the cash. Is it right to take the tax-free cash? Yes I want the money, but the conversion factor is 12 or 15, so even if I pay the tax, if the conversion factor is double or triple that, then its not such a great deal.
CA. The Government is being asked to do more to encourage partial transfers. Could consultants do more to promote partial transfers within the rules that exist?
SL. There is very little regulation around partial transfer. The trustee has to offer a full transfer value once a year to the member, and that has guidance and regulation around it. But it does not have to offer a partial transfer.
But if they do offer a partial transfer they can set the rules themselves. They can say it will be 50-50, only offered at retirement, and they can determine when or how it will be offered and what shape it will be. So it is a really interesting one from a benefits consultancy point of view – how to advise schemes on partial transfers. From my point of view with the member it appears an option that is little explored.
CA. What range of multiples are you seeing being offered?
SL. We have seen some factors of 50, but then there are also some terrible ones, down at 20 times. It depends on the scheme and how they set the calculation basis.
CA. Apart from the massive multiples on offer, what else is driving DB to DC transfers at present?
SL. Workplace rumour is affecting the level of enquiries coming through. We need to be wary about not just the facts, but the soft facts, the reasons in the workplace why people are considering switching. One of the advantages of having proper advice in the process means we can look at data and add two and two together. If Robin and John work in the same office and they’ve both rung up on the same day about similar things, that feels more than a coincidence. When you get three or four at once, our risk controls click in and check whether they have spoken to each other. It’s a good thing to get engagement, but it is a bad thing if you get groupthink.
CA. Are fluctations, down as well as up, driving interest.
SL. Yes. We are seeing schemes actually bringing the transfer value basis down, which is surprising people. So for the first time people are saying ‘actually, my transfer value has fallen. I thought it always went up’.
CA. What is the typical LV= pensions advice B2B client?
SL. We are working with schemes directly, through employee benefit consultants and with IFAs. Providing services for trustees for DB and DC is customer number one. Secondly we have an advisory practice in the occupational market or in the normal retail financial advisor, where within the proposition they have clients that they cannot service economically. And then we also work in back offices with legacy book providers.
The busiest area is the DB scheme sector by far. The activity in the final salary market is extremely high. A lot of people are asking a lot of questions.
CA. Which scheme members are you targeting most?
SL. Our Compass proposition is aimed at providing information and guidance to a final salary member post 55. So they can look and consider exercising their options. Compass is an online service that provides the individual data and information alongside educational material which channels through to actual actions, into a formal advice process. It is not an execution service, it is an advice service.
We have a safety first principle to our advice. Which is trying to make sure an individual minimises their risk of ruin. We have examples of where we have recommended people to stay as well as help people transfer out.