Former regulator slams transfer regulations.

David Fairs

LCP are promoting a blog by new partner David Fairs, until recently Executive Director of Regulatory Policy at the Pensions Regulator,  calling  for rule changes to allow more people to benefit from ‘freedom and choice’ in pensions.

Fairs points out that whilst those with DC pensions have been able to benefit from greater flexibility since 2015, there are barriers to those with DB pensions enjoying the same flexibility.

These barriers were put in place to obstruct the rush to transfer last decade when transfer values were often twice what they are today due to the tyranny of discount rates that valued DB liabilities based on artificially low gilt yields. Advisers were able to charge their advice to the transferring pot on a no-win no fee basis and for a time – CETVs were described as “no brainers” by those at the Port Talbot factory gates and FT journalists, even Ros Altmann got in on the act, promoting the joys of DB transfers to the affluent middle classes.

LCP and Fairs clearly look back to these times fondly, not only were members happily transferring risks to themselves, but LCP clients were benefiting from not having the risks on their balance sheets. Though transfers were obscenely high, they weren’t as high as the marked to market liabilities they removed. The press release accompanying David Fairs blog is elegiac.

But in recent years, the supply of high quality advice has diminished, and the cost of advice has soared, partly as advisers have faced rapidly increasing costs, including securing professional indemnity insurance.

The reality is that the advisers who were instrumental in “de-risking LCP advised schemes” are facing an existential threat resulting from many of these transfers being deemed “bad advice”. Many have no professional indemnity to cover future transfers, many are in administration or have been liquidated.

LCP meanwhile continues to promote the idea that members should be able to swap a defined benefit promise for cash, drawdown or a rollup of a DC pot – to pay the IHT bills. But they and their clients are frustrated to see the transfer flow drying up, not just because transfer values are now half of what they were, but because there are no advisers left to promote to their clients that they take the risks individually, that trustees struggled with – collectively.

The LCP solutions

David Fairs highlights two potential solutions, the second of which would require legislative change:

  • For more DB schemes to appoint a nominated firm of suitably qualified transfer advisers who members can use with confidence that ‘due diligence’ has been undertaken on the firm; even if the scheme only covers the set-up costs of the new advice arrangement, members will generally then pay far less for advice than if they source their own advice from a ‘high street IFA’.

This is a variant of the “incentivized transfer” concept advocated by benefit consultants that triggered the dash to cash by DB members. Steve Webb, another LCP partne, but at the time pensions minister, told the NAPF in 2015 that this process was the flashing of “sexy-cash”. That was then , this is now – you will need a lot more sexy cash to incentivise transfers today. You will need to find IFAs who are not still bleeding from assisting corporate pension advisers back in the day (think LEBC). The “de-risking exercises that encouraged ETVs and PIEs were carried out in full view of the Pensions Regulator. When the FCA intervened, TPR protected the corporate advisers and trustees and threw the IFAs under the bus.

I suspect that most advisers would  tell LCP today “once bitten- twice shy.

  • A change in the rules to allow people with modest DB pots to access drawdown under the umbrella of their DB arrangement either directly or via a carefully chosen third party such as a mainstream drawdown provider or (in due course) a CDC vehicle. The obligation to take regulated financial advice would be lifted where the option was within the same umbrella DB arrangement, but guidance would still be provided. Trustees could be required to ensure that any third party provider was authorised, that any investment options were appropriate and that charges were fair. This would, to some extent, mirror the duties which trustees are already under when it comes to vetting potential transfers under the latest anti-scam rules. From the member’s perspective, this would be a much smoother process than transferring out of the Trust altogether and having to source full financial advice, but would still provide good protections for the member against being scammed or selecting an unsuitable or high cost product.

This is the idea – much beloved of consultants – that trustees can create “safe harbour” solutions where the risk of things going wrong is assumed by third parties – in the extremity- the tax-payer – the insurer of last resort. There is a lot that can go wrong with drawdown and trustees of DC schemes have shown no appetite for taking on drawdown risks so far – even where those risks are managed by a third party provider – vetted presumably by another third party. The risks of investments going wrong , of members living too long and of advisers and providers going wrong are evident whenever you pick up an advisory trade magazine.

Running a safe harbour CDC scheme for members to swap a guaranteed pension for an accelerated non-guaranteed pension, within a single trust, suggests that trustees of DB schemes would have responsibility for the establishment and maintenance of such a scheme. Once again, this is fanciful. The only beneficiaries of such an arrangement will be the commercial entities providing professional services to the CDC. Once again, the risks will not be off-loaded, they will sit within the trust, albeit on the member’s not the corporate balance sheet.

Time to start again on transfers?

In his blog, Fairs seems to conflate the transfer regimes for DB entitlements and DC pots as “sticking plasters on an ineffective process”.

“The current requirement on members to seek Financial Advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process.

David Fairs suggests a “fresh look” arguing that the process we have ended up with, is not fit for the member’s process. But this flawed process was created on his watch when he was at the Pensions Regulator. It takes some chutzpah to decide that because the process is no longer working for his clients, it is wrong.

For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes.”

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Former regulator slams transfer regulations.

  1. John Mather says:

    In 2018 my client and I determined that his DB fund from previous employment
    Transfer offered was 41 times emerging benefits in 2024 (6 years ahead)

    His Tv gave him just under Lta which we were able to fix at £1.5M

    We took the money and the commencement lump sum bought 2 apartments in Dublin which were rented for his previously income less wife

    The rent in the first year exceeded the future Db promise

    We still had £1m to invest in the pension fearful only of the Lta over the next 6 years of growth

    Compliance said the transaction was unwise and should not go forward

    We persuaded them that the client was aware of the perceived risk but the rents were likely to provide a larger income than a joint life annuity even if interest rates quadrupled and they would start 6 years earlier

    The £1M cushion would support and limit this risk

    Had the transaction not gone ahead would the client have had a valid complaint as Tv has now more than halved

    • John Mather says:

      Incidentally both the rental and the capital value are up 50%+ and if you add the currency profit( the fund was invested in European shares directly, not through a fund Costs 34bp.

      The client wants to retire to Ireland when he returns next year we are examining the LTA issues

      Yes DB needs to be flexible and more than any other factor the advice needs not to abandon thinking outside the pensions silo

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