Let’s be clear, there are many occasions when it is suitable to transfer a DB scheme. I have seen many cases where transferring is the right advice, even transfers with outrageously high critical yields can still be suitable for certain clients. And when this is the case, if advisers are going to offer advice, then they must provide suitable advice – to transfer. I have seen instances where the adviser wouldn’t recommend a transfer because of a very high critical yield despite a transfer being the suitable advice. The reluctance in this situation was probably down to the compliance people or a view that the FCA would not consider a DB transfer with a very high critical yield to be suitable. This is wrong.
What I am more worried about, however, is advisers recommending a transfer when this is not suitable advice. You can see the appeal to the client – the ability to have access to a potentially large pension fund in a flexible way which can then be passed on to a spouse or children on the client’s death. We all know about hyperbolic discounting – people valuing money now much more than more money in the future. And the file can be given the sheen of suitability – the client’s objectives for flexible benefits, and assets to pass on to spouse and children at death, can be met by transferring but not by keeping the DB scheme. Objectives met, box ticked.
But ticking a box doesn’t necessarily mean it’s suitable or in the client’s best interests. If it was clear to the client they could have a much higher but inflexible income, would they have preferred this? If the DB income was higher even after paying into a whole of life plan to provide the death benefits the client wanted, would they have preferred this? If there was some other way of achieving the client’s objectives whilst retaining the valuable guaranteed DB benefits, would the client have opted for this?
Guaranteed DB pension benefits are very valuable. Advisers should be considering whether there are other options that meet the client’s objectives more effectively.
Wider pension options, increased flexibility, personal choice. It all sounds a bit familiar to people who have been in the sector for 30 years. Yes, we had all of these in 1988 and we know where that led. I’m not suggesting the problem is in any way the same scale as then. What I am saying is, remember (a) the SIB Pensions Review, (b) the additional rules that resulted from this which still sit in COBS 19 (additional qualifications, pension transfer specialist input, record-keeping requirements, default position is that the DB scheme is better etc), (c) the problems found by the FCA in 2014 around Enhanced Transfer Value cases, and (d) political sensitivity about Pension Freedoms working for consumers. Bearing all of these in mind, does anyone think the FCA would take anything other than a really hard line on any poor practices in this area?