Robin Hames: The untapped DB opportunity for corporate IFAs

While advice to wealthier individuals is the natural environment for many IFAs, an arguably greater opportunity for advice may actually sit at the scheme level says LGT Vestra institutional director Robin Hames

Ever since the introduction of the 2015 pension freedoms, there has been much discussion and attention on the extent to which individuals might be tempted to transfer their benefits out of a final salary scheme to take advantage of the new flexibility.

While initially the prediction of an avalanche of transfers proved less well founded, it seems undeniable that momentum has grown. Doubtless fuelled, in part, by the media raising awareness of the ‘record’ transfer values available as gilts yields, especially in the aftermath of the Brexit vote, slid further.

Clearly, these transfer values, in general, reflected the presumed increased cost of securing the promised benefits; although it has to be said some schemes in certain industry sectors – such as financial services – can appear to be offering more generous transfer values than others.

An article in June in the Financial Times quoted estimates by the consultancy firm Mercer that some £50bn has been paid out to 210,000 members of DB schemes since April 2015. In apparent contrast, the Pensions Regulator estimated only 80,000 transfers in March 2017. However, this did not take into account transfers – or members simply cashing in benefits – below the £30,000 advice threshold.

Whatever the true figure, it is undeniable there has been a significant increase in transfer activity and many IFAs are now actively involved in this complex area of advice.

While advice to wealthier individuals is the natural environment for many IFAs, an arguably greater opportunity for advice may actually sit at the scheme level.

The DB market is in the midst of a turbulent period: not only for scheme trustees but also for the actuarial and the investment consultancy community supporting them. There is, quite rightly, a regulatory pincer movement afoot.

As is well known, quantitative easing and squeezed gilt yields have had a significant impact on DB schemes: the Pension Protection Fund estimates that 73.5 per cent of UK DB schemes are currently in deficit.

The Pensions Regulator is concerned about the capability of trustee boards to effectively run their schemes and address this funding shortfall. It has launched a new campaign: 21st Century Trustee. The Regulator is keen to stress that it is not imposing new requirements but is more clearly setting out its expectations and the potential repercussion of failing to meet them. It has made clear its particular concerns in respect of trustee boards of smaller schemes.

At the same time, the Financial Conduct Authority has made clear its concerns over the manner in which the investment consultancy community conducts itself. The familiar language of ‘weak buyer side’ and conflicted interests littered the FCA’s review and informed its decision to make a referral to the Competitions and Markets Authority.

While the headlines have focused on the big three consultancies and fiduciary management, the reality is the FCA’s investigations led them to make some much broader assertions.

In a similar vain to the Pensions Regulator, the FCA has drawn attention to smaller schemes and the quality of investment consultancy support they are currently receiving. It warns that often the advice is limited and generic: “smaller pension schemes risk getting advice that is not tailored to their needs.”

There are in the region of 4,500 smaller DB schemes with less than £100m in assets. Between them, these schemes are actually responsible for somewhere between £180bn and £200bn of assets. It is a highly fragmented market with no dominant actuarial or consultancy firm.

While there are well-supported smaller schemes, there are many who receive, at best, a ‘light touch’ guidance and facilitation service when it comes to investments.

They desperately need proactive, regulated investment advice and a close, personalised service to help them fulfil their duties as a trustee, invest their scheme assets effectively to match their current and future liabilities and to reduce their funding deficit.

It is a market that could reap rewards for those capable IFAs ready and willing to step in.