The DB transfer debate: how to achieve good member outcomes.

Jonathan Watts-Lay, Director, WEALTH at work, joins Professional Pensions to discuss the current issues around defined benefit pension transfers and what can be done to protect members.

Q: What is the current state of play with regards to defined benefit (DB) transfers?

Jonathan Watts-Lay (JWL): Pension transfers have definitely been increasing and high transfer values have been a key factor in this increase – when an individual member sees they could get £20,000 a year in income or £800,000 as a one-off transfer, then that is very, very compelling.

Q: How should advice be provided and should it be employer or employee paid?

JWL: The key question here is actually how is this transfer being offered? Is this part of an exercise or is it an ongoing process? If it’s an exercise then the employer will be obliged to pay for it; if it’s an ongoing process then it will often be the individual that will pay for that. But I think the key point here is that, even if the trustees or the employer aren’t paying for that advice, they still have negotiating and buying power and can make sure both that the member is getting a good rate and that a reputable firm is being used. Of course, that doesn’t stop the individual going and using whoever they want, but having a more robust process in place does lead to better outcomes overall. What we’re finding is that some trustees and employers actually want a guidance service in place rather than people going straight to advice. People see these big transfer values and they’re quite often overwhelmed by them – and to have some guidance in place where someone is just being talked through, maybe over the phone, the generic advantages and disadvantages of a transfer before they get to advice can really help people. Some individuals will realise this isn’t quite what they thought it was and decide against the advice route. And if they do decide to go down the advice route at least they know what they’re getting into. Guidance at the front end can mitigate a lot of issues.

Q: What can trustees do to ensure members have reputable advisers? And how would you guide trustees if a scheme member has taken regulated advice but the adviser doesn’t appear to be very good?

JWL: If I take the second point first; from a trustee perspective, they just need to know that the member has taken advice. It’s not for the trustee to decide whether that advice was good, bad or indifferent because they won’t know about it and they shouldn’t know about it. All they need to know is the individual took advice. The trustee should not be getting involved with the detail of any recommendation one way or the other. Saying this, there is really a duty of care to have a robust process to help the member. Trustees appointing advisers need to have gone out and looked at reputable advisers, looked at the work they’ve done before, asked if they are doing this kind of work for other firms and assessed if they have got a pricing structure which is fair and transparent. Trustees can do a lot more around making sure there is a financial advice  firm in place that will tick all these boxes – it doesn’t mean that the individual member has to go down that route, but at least it gives support to a member and means they don’t have to try and find their own adviser. So I think it’s really important that trustees and employers find reputable advisers, albeit they don’t have to insist that the member uses that firm. And I think this is far more important than trustees worrying about the individual decisions that members make. And they should also check the adviser is qualified as well. It sounds like a ridiculous point to make but we see cases time and again where advisers do not have the pension transfer qualification and have to outsource the work to a third-party for sign-off. And this increases costs.

Q: Should trustees be running checks on the advisers individual members have chosen on their own?

JWL: I think this comes to the point of actually doing the due diligence and making sure you have a regulated advice firm in place that will tick all the boxes. That doesn’t stop the member going off and finding their own adviser but it’s not the trustees’ role to look at every last IFA in the land that may advise a member. But why put the member through this pain if the due diligence could be done by the trustees and the employer to effectively help avoid that? At the end of the day, the member can do whatever they want, but having an adviser in place helps avoid that situation.

Q: Many members prefer to use their own adviser. Should schemes be appointing advisers for ongoing transfers?

JWL: On balance, the view is now yes so we can avoid the pitfalls that have arisen in some schemes. However, you can’t force a member to use that adviser. So if a member already has an adviser and that individual thinks they’re appropriate and they can do the job and all the rest of it, then that is fine. But what you find, in most cases, is people don’t have advisers and so the issue becomes the other way round really. The issue is not for those few that do have advisers, it’s for the many who don’t, and are told to go and find them. As such, you do need to ask whether a more robust process should be put in place by the trustees and the employer.

Q: The FCA continues to look at the area of DB transfers – what change are we likely to see in the future? In particular, are we going to see shifts on contingent charging?

JWL: The FCA has confirmed that the starting point for a DB transfer should always be that it’s unsuitable and it’s for the adviser to demonstrate that it is suitable. There has been some debate as to whether or not this is the right approach but I think the FCA has now taken the view that, given what has happened with certain schemes, they need to stick to their guns on this. So the starting point must be that a DB transfer is unsuitable and it is for the adviser to prove otherwise. It also said advice needs to be holistic, which is quite interesting because if you go back to the old bulk exercises, often what would be paid for would be advice purely to cover the DB transfer – and it would not take account of other assets that individuals may have, or other things that would really influence whether that transfer was a good idea or not on an individual basis. So again, the FCA has confirmed that the advice process must be holistic – it’s no good just looking at a single DB scheme – that individual may have five DB schemes and they may also have defined contribution, and they may also have ISAs. If they are lucky, they might have £1m in the bank. There are a lot of things that need to be taken into account. The other thing the FCA has made clear is there must be a clear recommendation from the adviser. There were examples where someone would go through an advice process but there was not a clear recommendation one way or the other at the end of that. The FCA has said no, there must be a clear recommendation and the adviser must be clear as to the reasons they’re making that recommendation. Even if that recommendation is to stay in the scheme, they must still give their rationale as to why that is the case and why that is right for the member. So there has been a lot of clarity but I think one area where the FCA is sitting on the fence is contingent pricing. For a lot of people, the view is that contingent pricing is wrong – it must be wrong because if an adviser is only to be paid if a transfer goes ahead, then at face value that does seem to be biased. However, as I understand it, the FCA is concerned that if it introduces a ban on contingent pricing or says there has to be a charge for activity, there is a danger that where a transfer is right for an individual, they never actually get there because they’re not willing to pay the fee up front. So I guess you can look at it either way, but that’s where we are today.

Q: I haven’t touched on partial transfers. Currently only a small number of schemes allow these – should they be more widely available?

JWL: Partial transfers would be a good option for a lot of people. Currently, as I understand it, only about 15% of schemes offer partials and it does depend on the scheme rules. But from a member and an advice perspective, partial transfers are often quite appealing as the member secures income with the element of DB that they keep but then get flexibility with the element that they transfer. If more schemes offered partial transfers, I think there would be a lot more advice given to do those partial transfers.

Q: What are you key conclusions from this debate?

JWL: For me, the key thing is about having a robust process in place and not leaving the member to work it out for themselves. It’s about putting in place a process where an adviser is selected that has the qualifications, has done this work before, probably has national coverage, and is clear on the compliance processes as well as being clear on the regulatory record that that advisory firm has. If all those sorts of things are thought about and put in place, then you’re much more likely to have a good member outcome.