I was heartened this week to see financial advisers band together and provide free counsel to help to members of the British Steel Pension Scheme decide on the best route for their retirement. Every day we read negative headlines centred around defined benefit (DB) pension transfers. But, like anything, we tend to only ever hear the bad rather than the good. Probably because good news rarely sells papers (Royal engagements and wedding preparations aside).
In this post I share an article I recently penned for the Consultant View in New Model Adviser. I was asked to share my views on a ‘hot topic’ for financial advisers. I don’t think you can get any ‘hotter’ than DB pension transfers. And, given the outburst it created on Twitter, it would appear my views have added fuel to the fire.
Let me start with a little context:
In my view the most important job for a financial adviser is to achieve the very best retirement outcome for their clients. I would argue though – and this is what incited the ‘heated’ rebukes – that DB transfers, in the right circumstances, are a legitimate and potentially life-changing choice.
Across the UK advisers are being inundated with transfer enquiries to consolidate DB pensions into new, flexible vehicles such as Sipps, which offer a different balance of positives to the ‘guaranteed income’ of a DB pension.
There are several drivers behind these requests. First, consumers have greater access to information than ever before, particularly via ‘word of mouth’ with many openly discussing the possible transfer values of DB pension assets.
Second, trustees and actuaries are incentivising transfer outs to protect their assets and liabilities position. Indeed, I was recently contacted by a family member seeking advice because they had been approached with an ‘offer’.
Third, scheme failures and those in distress are making national headlines (look no further than British Steel). This leads consumers to question whether their DB scheme will always be there.
A bold move
In 2014 the Financial Conduct Authority (FCA) and the government made a monumental decision, drawing the conclusion that annuities weren’t all that good after all. With pension freedoms they offered surety but no inheritance or transitional value. So how does a DB scheme differ? In reality, I believe it carries greater risk because you can’t guarantee the sponsoring employer will be there to deliver the guarantee.
Advisers, rightly so, are questioning whether that risk of advising on a DB transfer is worth it. While the economics work over the short and medium term (i.e. for some clients, where transferring most certainly will lead to a better retirement outcome) the question remains: are we building up for a new payment protection insurance scenario?
Views differ greatly across the value chain (those voicing their views on Twitter appear to believe that DB transfers are undoubtedly the next PPI and in no circumstances should a client be advised to transfer) and the FCA is highly sceptical about such movements. But the advisers I speak with are more open to considering all options for their clients (in my original article I used the term ‘savvy’, which was shot down so I have omitted it here) and understand that for many clients, DB transfers are absolutely right.
A contact within my circle recently took the decision to transfer his own scheme and views the outcome as life changing. I guess the question is whether professional indemnity insurers and the regulator will agree.
Flexibility versus security
The question then becomes about measuring value. How does one measure the ‘value’ of being able to transition your pension capital to your estate, versus a guaranteed level of income, that isn’t subject to market risk?
I would argue that appropriately invested Sipp assets, coupled with the inheritance protections and portability of Sipps, significantly outperform investment a typical DB fund, even allowing for charges. Note that by ‘outperform’ I am not referring to investment performance. I mean the overall ‘retirement outcome’ will be better for the client.
It comes as no surprise (or perhaps I should say it was ‘inevitable’) that we have seen value extraction from DB schemes post pension freedoms. It created awareness and incentives. These two factors will drive people to act en masse.
Making it work
If I were an adviser, the first thing I would do would be embrace the change and continue doing a good job for my clients; advising each client based on their specific needs, the available facts and likely outcomes. I also would ensure I document my suitability tests and financial advice very, very tightly (just like all of the good financial advisers in our profession).
To give the client the best opportunity of meeting their retirement objectives, making the right investment choices is crucial. Ultimately, it is investment returns that will determine whether this situation evolves into a new PPI (i.e. if a DB transfer is recommended and then the investment solution – all things considered, including charges – doesn’t stack up, then clients will undoubtedly seek compensation).
Next, I would seek out quality, low-cost providers to facilitate my advice so that charges don’t have a negative impact. And this is across the value chain, not just the cost of the investments/investment management, but in the implementation, the product or platform charges too.
Last, I would focus my efforts on consumer education. This is key to consumers making considered and informed decisions, which in many instances could be life changing (view this post DB pension transfers through the eyes of a consumer, to understand the impact on this client).
I encourage you to provide your comments below.
This post was created for the DISCUS website by Abbie Knight. The article originally appeared in New Model Adviser. If you are interested in reading more about the positive side of DB pension transfers, read this post (with a short video).