Britain is in great need of advice on transfers between one pension and another. This doesn’t just mean transfers from defined benefit schemes to defined contribution schemes, it means support in transferring pot to pot transfers for DC arrangements.
Unless you have a very small DB benefit, you will have to take regulated advice before you free up your benefits, insurance companies are writing to customers looking to move their pots warning of potential risks and urging they take a similar course of action.
In this article I outline the bind that we are getting ourselves into as we collectively ask
The value of a transfer
There are a number of objective people may have for wanting to shift money. For instance
- Performance – they think their money will work harder for them and provide more for them in the future
- Guarantees- people do not want the guarantees they have been offered (or aren’t prepared to pay their price
- Freedom- people want to spend their money in retirement how they like and not have a pattern of payments imposed on them
- Control – some people are uncomfortable with others managing their money and want to have day to day control of its management
- Debt, the immediate need to release a person or a family from debt may mean swapping future security for a way out of a crisis
These objectives are collectively the value of the transfer
I am sure there are many other objectives that people have for bringing their savings together , though if one Lamborghini is actually purchased from aggregation, I would be surprised (cue one reader sending me their pre-order form!).
None of these objectives makes it right to transfer. But the point of pension freedoms is that it puts people’s objectives back at the top of the agenda, it’s no longer what fiduciaries think is right that matters most, in the end it is what people think is right for them.
People want some light in the darkness.
I we freedom and choice, let’s make sure the choices are informed.
Before pressing the transfer button, people have a right to know what is being given up as well as what is being gained. When people were last encouraged to transfer like this, it was in the late eighties and nineties when the introduction of personal pensions was seen as a reason in itself to transfer.
Many people were advised to transfer because they could. The net result was a massive restitution program that cost personal pension providers and advisers a fortune and tainted the reputation of pensions for decades.
The cost of a transfer
For most people, the value of a transfer needs to be weighed against the cost of a transfer.
The cost of the transfer is more easily measurable than the value but it is still partially a subjective measure. For instance, it’s a matter of opinion whether one fund will produce more money than another, that the security of one promise is higher than another or that the transfer value is a fair reflection of the benefit given up.
Of course there are objective measures; we can estimated transition costs with reference to those incurred from other transfers and if we have proper information (IA pleas note) we can assess the value for money of one fund over another in terms of returns achieved against costs incurred.
But a risk assessment made about someone’s own money is bound to be subjective, and it’s considerably harder to make a decision on your own money than it is on other people’s money, because this decision affects your and your family’s future – possibly for decades to come.
Value for money
The formulations for value and for cost are fiendishly difficult and questions like “is it worth it?” cannot always be answered with a yes or no, there are too many “it depends” clauses that need to be inserted along the road to a decision.
Value for advice?
For advisers, the “is it worth it?” question is almost as hard. The value is in the fee that can be secured (or the income stream from funds under management) plus the value of helping a client out- in terms of relationship management. But the cost of getting it wrong, in terms of fines, restitution and reputational damage is high.
This week we have heard a number of IFAs and IFA groups stating publicly that they will not give transfer advice. In the same week, I hear that
” market research conducted earlier this month by Hargreaves Lansdown suggests that about 500,000 of the 6.8 million DB scheme members in the UK plan to transfer their money to DC schemes following the introduction of pensions freedoms – about 8% of the total.” – Professional Adviser
We are in a bind here; 8% of people in DB schemes (and many more with legacy DC benefits) are looking for advice on whether transferring from the DB scheme towards “pension freedom” adds sufficient value for the cost involved.
But advisers will not advise or will only advise at a cost which most people will not entertain.
When we get to such a stand-off, there needs to be some intercession, either from the top or from the bottom (or both). It could be possible for the boffins in Canary Wharf to construct a new section of the COBs rule book, consult on it and enforce it. But this process would take a very long time and runs the risk of being over-engineered and unwieldy.
The bottom up approach involves advisers, with the help of someone who wears a collective compliance hat for advisers, going to the FCA with a code of practice , constructed by advisers under which advisers would be able to support individuals make decisions without fear of recrimination. By recrimination, I mean both civil or regulatory litigation.
What that solution looks like in detail is not for these pages. I’ve described the three legged stool , with client objectives, a credit risk assessment and a transfer analysis in a recent blog.
A code of good practice looks like the basis of an “is it worth it?” discussion that can lead to somebody taking an informed choice.
But as a bottom up solution, perhaps organised around Threesixty , such a code could not in itself provide protection. It would need to be tested by the FCA and approved. I am interested in the FCA’s Innovation Hub and how it can be used to help this problem.
More questions than answers
For the trustees of occupational pension schemes and the IGCs of insurance companies the issues are broadly the same, is it better for the members they represent to exercise their freedoms and move to good or is it better to stay put (the devil you know). They cannot advise their members other than to recommend Pension Wise
Pension Wise cannot give advice and can only recommend taking financial advice. So the Bind extends beyond the individual and the adviser and encompasses employers and trustees, Pension Wise and ultimately the people who set these Pension Freedoms up.
For all the talk of “second line of defence” there is no obvious answer to the question “is it worth it”. In this, as in so much else, only leadership will see us through.
Call to action
I hope that you will feel you would like to be involved, whether as a member, employer,trustee, regulator or advisor. If so, please drop me a line on firstname.lastname@example.org. I already have many such emails (thanks to all who wrote this week).
I promise to run with this till I can pass the baton to someone or some people better fitted to taking it on.