The following article was first published in the March 2019 edition of Pensions Aspects magazine.
At the start of 2018, it looked like the upward trend in Defined Benefit (DB) transfer activity was set to continue. Despite sound predictions, activity started to tail off towards the end of the year, which raises the question of whether the DB transfer bubble has finally burst?
If tangible proof is needed, then you need only look at recent results for AJ Bell, who reported DB inflows of £300m in the quarter to 31st December 2018, compared to £600m in the same period a year earlier.
The signs are that a longer term cooling off is now inevitable. A market investigation by the Financial Conduct Authority (FCA), combined with increasing professional indemnity insurance costs for financial advisers, is suffocating adviser-side appetite for this type of transaction. The vice-like pressures of risk and regulation are slowly
squeezing out commercial enthusiasm, especially in a saturated market where the largest commissions and fees are already taken. Last year, in response to concerns raised by advice given to members of the British Steel Pension Scheme (BSPS), the FCA started its probe into practices across the entire market by sending out questionnaires to all firms regulated to advise on DB transfers. It found that less than 50% of the advice it reviewed was suitable.
Equally, saturation on the demand side seems to have been reached with those sponsors and trustees that are willing and able to actively promote transfer options with their memberships having already done so. However, total coverage for transfer value promotion, incentive or communication exercises is still a long way off. Across Trafalgar House’s membership portfolio, only 30% of schemes have undertaken this type of activity; despite such an exercise potentially offering mutually beneficial advantages to sponsors and members alike.
Increasing regulatory scrutiny, and some very well publicised transfer process failures, have created such a culture of fear that trustees and sponsors can now feel that doing nothing is the best, safest and least risky option. Judicious caution has become fear-induced paralysis.
DB transfers can, and do, represent a good deal for some members. For those who do not have dependants, who may want a flexible income, who are in ill health, have significant guaranteed benefits elsewhere, who want to work beyond state pension age or who need a lump sum for social care, a transfer is still an important option that should be considered. Shying away from highlighting the relevant merits, as well as the appropriateness of a transfer, could result in retirement planning suffering a fatal flaw.
Put yourself in the shoes of a member where a DB transfer is a good option:
- Firstly, you are warned by regulators that transfers are the primary target of scam artists
- You are then warned by your administrator that transfers are extremely high risk and require a bewildering list of forms and documents to go ahead
- Your financial adviser then tells you that the default assumption is that all DB pension transfers are unsuitable
- Finally, you are then taken through a lengthy set of validation checks, additional warnings and scrutiny to ensure the security of the transaction.
It takes a very brave person to go through with it.
The delicate equilibrium between prudence and opportunity has shifted too far in favour of restraint.
Trustee attitudes to transfers have broadly fallen into two categories. Champions; those that see transfers as a legitimate option, the pros and cons of which should be highlighted and explained to members, and observers; those that prefer a more passive approach, seeing transfers as just one of many options that members can access and should not, therefore, be subject to any special signposting.
Champions believe that liability and risk for the decision to transfer sits with the member and their financial adviser. The scheme can be absolved of any accountability should recourse be sought on the appropriateness of the transaction, and the members interests have been best served by making sure they have reviewed and been advised on its possible merits. A liability has been removed from the scheme, potentially removing some risk. What’s not to love?
Champions go on to argue that most scheme literature, guidance and processes are bent towards the de facto default option of scheme pension, which may not be the best solution for all. Further, they believe that it is a necessary part of a trustee’s duty to act in the best interests of beneficiaries by providing more illustrations on the relevant merits of a transfer and breaking the default assumption of scheme pension.
Observers, on the other hand, believe that asymmetrically promoting one option can lead to an inherent bias, or worse, endorsement. By promoting, advising or highlighting transfer options, trustees can become complicit in the decision making process and are open to judgment if it all goes wrong. Simply leaving the option buried in the slew of scheme literature for members to illicit themselves is the safest option and meets the burden of impartiality.
As with all things in life, balance is the key and no more so than with transfers.
The last two years have quite rightly seen the balance for administrators lean towards warning and protecting members, this having been matched by a range of very good regulatory campaigns doing the same. Both have culminated in one of the most systematic and detailed reviews of best practice and guidance on transfers; we’ve never had such a robust and closely managed transfer process. Balance is easily lost, and when it’s gone, members lose out.
Now is the time to take stock. To reconsider the additional controls and measures put in place to protect members. But also, to consider the risk of doing nothing; that burying the transfer option in the complex mix of other options could seriously harm a small number of members who would benefit from taking it. It is still possible for sponsors, trustees and members to all benefit from a DB pension transfer and we need to maintain a balanced view that isn’t shaped only by the fear of transfer process failures.