In April 2015, the introduction of pension freedoms provided those aged 55 and over with greater control over the future of their pensions.
According to data from the Financial Conduct Authority (FCA), £20.8bn was transferred out from defined benefit (DB) schemes during 2017, more than double the volumes registered in the previous year. Since the rules were introduced close to four years ago, HMRC figures show that more than one million people have made withdrawals from their pension, totalling £23.6bn.
Looking ahead, consultant Hymans Robertson predicts that over the course of the next 25 years, one million people will transfer their pension. In addition 40,000 savers a year will access their pension under the new pension freedom rules.
One of the reasons behind this trend is that we are seeing a period of unusually high valuations on transfer values due to the low interest rate environment and lower 10-year government bond yields. There appears to be an insatiable appetite for people to move their pension nest eggs into defined contribution (DC) plans in order to access them through income drawdown.
Key challenges of pension freedoms
It seems to me that much of the financial services market will be impacted, if it hasn’t been already, by the actions above. One of the key challenges is when and how financial advisers and the industry at large can help individuals to make good decisions throughout their retirement. In a recently published paper on the subject by the FCA entitled ‘Advising On Pension Transfers’ (June 2017) they stated that having reviewed 88 DB transfers where the adviser’s recommendation was given to transfer the pension and consider a recommended product, they found the following:
» 35% were suitable
» 24% were unsuitable
» 40% were unclear
The FCA went on to say that firms must make sure that their personal recommendations are suitable for their clients. However, many firms had designed processes and procedures which result in transfers where the suitability of advice could not be established by the firm.
This included firms:
» Failing to obtain enough information about clients’ needs and personal circumstances.
» Failing to consider the needs of the client alongside the client’s objectives when making a recommendation.
» Not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits.
In some cases advisers had failed to make appropriate comparisons between the DB scheme and the intended receiving scheme. Therefore advice was based on incorrect or inaccurate comparisons.
Additional guidance for suitability
The FCA proposes additional guidance to help advisers assess suitability which will make clear that in order to provide a suitable recommendation an adviser should consider the following elements:
» The client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made.
» The specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client.
» The way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements.
» Alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk.
» The relevant wider circumstances of the individual.
Making money last through retirement
So help is on hand for advisers in what will prove to be one of the most important areas of financial advice since time began. But who will look after the money and ensure that it grows and lasts for clients throughout their retirement?
This is not a job for an amateur or the faint hearted, there is simply too much at stake. This pot of money needs to be managed professionally and in some individual cases will need to last for decades. What is required here is a Discretionary Fund Manager (DFM) with a credible philosophy, process, experience, evidence of past performance, support and many other attributes that make up a number of DFMs available to the adviser market. The adviser’s role will be to sift through various due diligence documents and a beauty parade with a select few. The adviser will then be able to advise the client who is best to manage their pension pot.
There is everything to play for.