The wheels keep turning for DB pension transfers, as do debates about which direction to head in. At the very least, clients should be aware of their options
The debate around transfers out of defined benefit (DB) pension schemes rumbles on. Some advisers are passionately against the idea and others almost equally passionately in favour. There is probably room for both views. As the old adage beloved of the actuarial profession says: it depends.
At least the regulator appears to be edging away from the stance of assuming DB transfers are always a bad idea. Still, its recent work suggests shortcomings in the quality of advisory work in this field.
Its actions in the market, such as agreeing voluntary cessations of advisory transfer permissions with a number of prominent firms, might suggest a continuing nervousness around transfers.
Advisers who lived through the pension mis-selling debacle of the 1990s and early 2000s are also understandably concerned, envisaging claims by clients and professional indemnity insurance issues as a result. This is all perfectly understandable. However, now might be a good time to take stock and consider why we are where we are, and make some observations.
Do you hear the people sing?
The first thing that strikes me is that the demand to transfer out of DB schemes has not been generated by the advice community, with some small exceptions. The demand is from people who can see weak employer covenants, and who wish to have their pension money under their own control. After all, it is their money.
The control factor is very important to people. It has supported a near 20% year-on-year compound increase in assets under administration in Sipps over almost three decades.
A change of mind
The second observation is how the freedom and choice agenda, introduced two years ago, changes everything we thought we knew about pensions. Now, who would not wish their pension funds to be heritable across the generations? Who would not wish their pension income to match their actual, known expenditure requirements?
These are not linear, as we know from the research base. Expenditure is higher in the early retirement years as people, quite rightly, take advantage of good health to do the things they have looked forward to for decades. Linear income, such as that provided by DB pensions, or annuities, simply does not meet real-life requirements. Perhaps it is no wonder people are looking for new ways forward with their pension savings.
In light of these observations, I am not surprised at the huge demand for pension transfer advice. I have not even gone near the assessment of cash equivalent transfer values. Just on the principles, there appears to be a strong case for at least considering a DB transfer.
Not everyone should be advised to transfer. It depends on individual circumstances, needs and objectives. Money matters are as much an emotional subject to people as a logical one.
Perfect outcomes and risk minimisation are the Holy Grail. Pension freedom and choice was strange as it flew in the face of a regulatory agenda that was heading the other way, bestowing choices on people that the regime had sucked away.
People need to engage with and understand their choices. This means taking, and paying for, financial advice. Potential mis-selling liabilities may actually come from consumers who were not told they had the choice to transfer from their DB schemes and missed the bus as they drifted into retirement.
Malcolm Small is a special adviser at Copia Capital Management