Trustees must step up and protect DB members considering a pension transfer.

7th September 2020

The ban on contingent charging for defined benefit (DB) pension transfers, where financial advisers only get paid if a transfer goes ahead, will take effect from 1 October 2020.

Jonathan Watts-Lay, Director, WEALTH at work comments on the changes and what Trustees can do to make the whole process far more robust;

“From October, contingent charging will be banned on DB transfer advice. This means anyone wishing to take DB transfer advice will need to pay a fee up front. Clearly this may put some people off and of course, there is a danger that this may result in an individual not pursuing a DB transfer, when in fact it may be the best thing for them to do given their personal situation. But, it is only when the advice is received that the individual knows whether a transfer is appropriate for them or not.”

He adds; “However, there are steps before regulated financial advice which an individual can take and this is where Trustees and employers can ensure a much more robust process is put into place.

Firstly, a financial education and guidance triage service can be offered which provides the individual with the generic upsides and downsides of DB transfers. These have to be presented in a completely balanced way so as not to influence the individual one way or the other which is best.

The second is abridged advice, a new type of advice where the adviser will look at member attitudes towards risks such as investment, longevity and inflation, but will not carry out any financial analysis such as Transfer Value Comparisons (TVC) or Appropriate Pension Transfer Analysis (APTA).  With abridged advice, an adviser can only provide a recommendation to either not transfer, or to inform individuals that it’s unclear whether they would benefit from a transfer. What it can’t do is recommend a transfer, as this can only be made when paying for full regulated DB transfer advice.”

Watts-Lay comments; “Any measures put in place to help members access financial education, guidance and regulated financial advice when considering a DB pension transfer have to be a good thing. However, the concern still remains that even though full regulated financial advice must be sought to transfer a DB pension if its value is £30,000 or above, there is no requirement to take ongoing advice once the transfer has been made and no guarantees that future income needs will be met unless the transferred money is managed well.”

He states; “Trustees have a duty of care to ensure employees and members make informed choices when accessing their pension. Providing financial education and guidance to members at retirement can help them understand their options and avoid any risks including those associated with DB transfers, such as falling for a scam, buying inappropriate retirement products, paying more tax than necessary and ultimately running out of money. This in turn, will help members to make informed decisions and avoid costly mistakes. It can also help them to decide if they need further support such as regulated financial advice.”

Watts-Lay explains; “Trustees are currently under no legal obligation to provide access to regulated financial advice to its members and for a long time there has been a concern that it carries risk for the Trustee. However, a discussion paper from Eversheds Sutherland and Royal London suggests that this theory only looks at ‘the risk of doing something and not at the risk of doing nothing’. It highlights that simply referring members to a list of advisers for them to choose from can lead to significantly poor member outcomes and therefore member distrust. In some cases, this can result in reputational damage as seen with British Steel.”

He comments; “Schemes should instead step up and ensure that reputable firms are sourced which have been subject to thorough due diligence, as well as agreeing consistent and fair pricing. This would make the whole process far more robust.”