Will DB transfers ever be viable again?
Written on 15/08/2019

Since the early 1990’s we have seen a raft of issues with advice to transfer out of Defined Benefit/Final Salary pension schemes and into personal pensions (PPPs) 

Back in the 1990's after the encouragement to transfer to personal pensions was introduced we saw a huge rise in transfers out of DB and into PPPs, this then in later years triggered a huge review of the regulations surrounding DB transfer advice and it started to become harder to give advice in this area. 

Then we had British Steel! 

Here was an employer and pension scheme that went to great lengths to protect members and their pensions despite overwhelming pressure to reduce costs. 

In the wake of their announcement that member’s would have two choices there was an enormous influx of enquiries to the scheme regarding these options. 

In short members could: 

  1. Move into the PPF
  2. Move to the new British Steel Pension scheme 

Members could also transfer out to another registered pension scheme and this was the source of the scandal that in the end took down several financial advisers. 

DB advice is complicated and expensive and it is harder than ever to realistically justify that a transfer out into a personal pension is a good idea for someone. 

However it can still be demonstrated that this sort of advice can work. 

The FCA has not banned DB transfers, they have just stipulated that there is a right way to give advice. 

While I am not going to go into detail here I will summarise some of the most important aspects of carrying out work in this highly specialised area of financial services. 

In my opinion, the following are important: 

  • You should begin with the rationale that a transfer out is not in the client’s interest
  • You must acknowledge that the client is giving up potentially, guaranteed and risk-free (to a degree) benefits
  • DB is likely to be for many, a significant part of their potential retirement income stream
  • Data gathering is critical, knowing your client is paramount 

The process for looking at any DB transfer for a client is: 

  • Triage – Accessing educational material regarding Defined Benefit pensions and the risks of transfer to flexible benefits/personal pensions to give guidance as to whether entering the DB transfer advice process is suitable (as it is often expensive)
  • Extensive data gathering on the existing scheme and the benefits provided coupled with detailed data gathering on the client with a particular focus on soft facts as well as hard facts (the aim is to be able to demonstrate suitability or not)
  • TVAS – A Transfer Value Analysis report that incorporates a Transfer Value Analysis Comparator this generates a set of financial comparisons on key benefits. It is important to note that as soon as an adviser produces a TVAS report they must give full advice
  • Suitability report – There are only two outcomes, retain or transfer. This report must demonstrate overwhelming evidence if a transfer is recommended, if overwhelming evidence is not forthcoming then the advice is likely to be “retain” this must contain a detailed cash flow analysis in addition. 

While many networks and larger advisory firms have their own guidelines on what makes for good transfer out reasons, some of mine are: 

  • The client has significant, guaranteed income elsewhere and in essence can afford to lose a large proportion of the Cash Equivalent Transfer Value (CETV)
  • The client has significant assets held in a low risk environment that can be called upon to support any falls in income from the transferred funds
  • The client has an overwhelming capital need that cannot possibly be met from any existing sources (and a transfer could supply a larger tax-free sum)
  • The client has serious succession planning concerns 

Now while I am not giving anyone advice here I am suggesting that there can be justifications for looking at a transfer and for entering the advice process with a client, what I am not saying is that DB transfers can go ahead! 

One of the crucial things that advisers should do is approach the subject as an opportunity to give their client “pure advice” 

I have seen more suitability reports end in a “retain” recommendation than “transfer” and transfer advice is not cheap, it is detailed and time consuming but I do not think that advisers need to shy away from this, rather they can embrace it as an opportunity to provide pure advice to a client. 

If you approach this as the chance to give real advice and charge a fee then you are unconcerned with the outcome, you are concerned with providing your client with the most appropriate and relevant advice for them. 

One of the by-products if you will, of a DB transfer suitability report, is the level of detail that it goes into in describing the existing DB scheme and all its benefits. I have seen many a member in the last 25 years that was unaware of what they already had and the result of the advice process was highly positive, they learned just how good their DB pension was and how valuable it really was to them! Plus that their adviser knew their stuff and was worth the fee! 

Never has financial advice been, in my opinion, been so worth the fee!

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