The UK Treasury’s 2014 consultation response to ‘Freedom and choice in pensions’ speculated that “the demand to transfer from a DB scheme is likely to be low”. The document also speculated the main reasons why some individuals would request transfers out of their DB pensions, for example:
- if they are heavily in debt;
- if they have a short life expectancy;
- if they are unmarried and do not have dependants; and,
- if they would prefer wealth to an income stream.
100,000 transfers in one year
The Pensions Regulator has recently confirmed: “For the period 1 April 2017 to 31 March 2018, DB pension schemes have reported approximately 72,700 transfers out … the total value of those transfers was approximately £14.3bn ($18.8bn, €16.1bn). However, not all schemes reporting that transfers took place have reported exactly how many transfers they carried out and therefore taking into account non-responses, we estimate the actual figure to be in the region of 100,000.”
Furthermore, Lane Clark Peacock (the consulting actuaries), reported that from its experience, 7.7% of deferred members requested their cash equivalent transfer value (CETV) in 2017. Also 28% of the 7.7% subsequently transferred, at the average age of 55, with an average value of £501,000.
Given that The Pensions Regulator estimated that there were 5.5 million deferred members in 2016, these data sets suggest that in one year alone almost 2% of all deferred members have transferred.
Why the increase in transfers?
It is increasingly clear that reasons not anticipated in 2014, but later acknowledged in Consultation Paper 17/16 section 2.4, have fuelled the trend considerably above expectations.
DB schemes have been headline, front page news in the UK. There have been reports on employers struggling to meet the ongoing costs of their DB schemes. In some instances, household names have gone bust with the associated DB scheme falling into the protection of last resort – the Pension Protection Fund. An anxiety about the long-term future of DB schemes has led to some deciding to take matters into their own hands and no longer rely on the promise that their DB scheme has made them.
It is worth noting that a funding snapshot of a DB scheme can be misleading. After years of reporting that the DB schemes of the FTSE100 companies were in deficit, Lane Clark Peacock has very recently reported that they are now in surplus. It will be interesting to see how this positive news is reported by the press.
Furthermore, the CETVs currently offered by DB schemes are often larger than the net value of the benefits that the DB scheme could provide and this has left many astounded by their pensions’ new potential worth. Although there are many reasons for these trends, they can also be considered to be the opposite side of the same political coin.
The £435bn worth of quantitative easing since 2009, including the repurchase of gilts from DB schemes themselves, has raised the prices of gilts and lowered their yield. The direct impact has been to increase the cost of asset matching the DB scheme liabilities, which in turn has inflated the equivalent capital value of a member’s DB pension.
Meanwhile, the UK Financial Conduct Authority (FCA) has kept watch, challenged by Frank Field (chair of the House of Commons Work and Pensions Select Committee) for being “asleep at the wheel” regarding the British Steel pension scheme transfer debacle.
The FCA talks about “the harm we are trying to address”, referring to inappropriate DB transfer advice and the selection of investments chosen to replace the forgone income stream.
Simultaneously, the Financial Services Compensation Scheme (FSCS) has reported an increase in claims regarding Sipps and Sipp investments. The number of professional indemnity insurers offering cover for UK pension transfer specialists (PTS) has reduced, while fees and the FSCS levy component relating to transfer activity and Sipps has gone up.
Indeed, as Keith Richards (chief executive of the Personal Finance Society) has speculated, “pension freedoms are in great danger of being derailed if professional indemnity insurers continue to overreact and withdraw cover for regulated advisers and their clients”.
Are overseas clients being prejudiced?
April saw the long awaited output from the Department for Work and Pensions’ consultation, ‘The advice requirement and overseas pension transfers’. Originally consulted in September 2016, its aim was to consider if clients overseas, often requiring the services of a local adviser as well as a PTS, were being unduly prejudiced.
It’s perhaps not surprising that it concluded: “We are not satisfied that an easement that allows the advice requirement to be met by an adviser not authorised and supervised by the FCA would offer sufficient protection to members.”
In the same week during April, Policy Statement 18/6 was delivered on ‘Advising on pension transfers’, only partly concluding the original Consultation Paper 17/16, and requiring further consultation in the form of CP18/7 ‘Improving the quality of pension transfer advice’.
Do the new rules add clarity or complexity?
Advice now needs to be a personal recommendation.
Where a two-adviser model is used (almost entirely the case in the offshore world), any difference in opinion between the client’s overseas adviser and PTS must be bottomed out and agreed before the recommendation and report is provided to the client.
The PTS must have all client information that the other adviser has at their disposal, not just for a pensions’ review, but sufficient for a full financial planning service including the specific overseas aspects of any potential choices.
From October 2018, the rules and guidance are updated.
The current transfer value analysis (TVA) is replaced by the more rigorous appropriate pension transfer analysis (APTA), which must be client and scheme specific and personalised to the client’s needs.
They also require a transfer value comparator (TVC), augmenting or replacing the critical yield. This new graphical representation is to make it easier for a client to understand the difference between their CETV and the cost of purchasing on the open market the equivalent of what their DB scheme offers. If a client needs a guaranteed income for life equivalent to that of their DB scheme, this is very likely to highlight that they shouldn’t transfer. This is because the TVC is generic and uses a risk-free rate of return, and an annual charge of 0.75% in accumulation.
Consultation Paper 18/7 ‘Improving the quality of pension transfer advice’ is now closed, and we await the resultant policy statement in the autumn. The areas considered include:
- raising qualification levels for pension transfer specialists (PTSs) to require them to obtain the same qualification as an investment adviser;
- guidance to clarify how advisers should explore clients’ attitudes to the general risks associated with a transfer, in addition to their attitude to investment risks;
- guidance to illustrate how firms can carry out an appropriate ‘triage’ service (an initial conversation with potential customers), without stepping across the advice boundary, by providing generic, balanced information on the merits of pension transfers;
- a requirement for firms to provide a suitability report regardless of the outcome of advice; and,
- possible intervention in relation to charging structures. This could include introducing a ban on contingent charging, which is when a fee for advice is only paid when a transfer goes ahead.
Whether the output will be implemented from 1 October, alongside the new TVC and APTA, is unclear, though the direction of travel most surely is.
As if this wasn’t enough for practitioners to think about, in June the FCA published its long awaited ‘Retirement Outcomes Review’. This looks at how the retirement income market is evolving since the pension freedoms were introduced in April 2015, sets out a package of proposed remedies to address the concerns identified, and initiates further consultation, namely CP19/17.
Although the increased costs inherent with such regulatory change may render the cost of advice disproportionately high for some, these measures will undoubtedly ensure the quality of advice and improve consumer confidence.
What does this mean for the wider advice process?
Old Mutual International recommends consideration of a detailed five-point plan as a matter of best practice to help cover the regulatory requirements and ensure decisions can be appropriately made. The headlines of the process haven’t changed for 1 April 2018, nor will they for 1 October 2018 when the remainder of PS18/7 becomes real, but the component parts most certainly have.
If you are in this market, read our ‘DB Transfers: Advising with confidence. Five best practice steps for a robust DB to DC transfer process’ We will keep you informed as the regulatory landscape further develops throughout 2018.