Friday, 24 November 2017

    FCA consultation on DB to DC transfers

    The high-profile withdrawal of Intelligent Pensions from the transfer market earlier this month pushed debates around current regulation to even greater heights

    If you’d put any two pensions financial advisers together in a room over the last month, the hottest topic of conversation will undoubtedly have been defined benefit (DB) to defined contribution (DC) transfers.

    The high-profile withdrawal of Intelligent Pensions from the transfer market earlier this month pushed debates around current regulation to even greater heights. While the reasons for Intelligent Pensions’ withdrawal are unclear, the timing of the Financial Conduct Authority’s (FCA) much-awaited consultation on the practice, Advising on Pension Transfers couldn’t be better.

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    James Walsh, policy lead EU and international at the Pensions and Lifetime Savings Association (PLSA) says that 92 per cent of DB and hybrid schemes have received transfer requests within the last six months. With volumes racking up since the introduction of freedom and choice, making sure that regulation keeps pace is essential.

    At the heart of the proposal is a significant shift in thinking: “We propose to remove the existing guidance that an adviser should start from the assumption that a transfer will be unsuitable”, says the FCA’s paper.

    Andy Bell, actuary and chief executive of AJ Bell agrees that “it is right that advisers should assume a neutral starting position.” He describes current practice of assuming that DB transfers are unsuitable as “a view from a bygone age”. Darren Philp, director of policy and market engagement at The People’s Pension adds that the consultation “catches up with the way people want to consider their retirement options following the introduction of freedom and choice.”

    it is right that advisers should assume a neutral starting position

    Another change is a shift away from the current transfer value analysis requirement (TVA) to a comparison showing the value of the benefits being given up. Industry response to this has been more mixed, however. “The new comparison will help to focus members’ minds,” says Walsh. But Bell is wary that the new comparator “shares the same flaw as the current TVA. They put annuity rates at their heart, when annuities are wholly irrelevant unless someone wants to take a transfer value now and then buy an annuity at the point of retirement.”

    “Not only that,” adds John Hatchett, Partner, Hymans Robertsonit seems to suggest advisers must actually ignore what nine out of 10 individuals will choose to do (i.e. take tax free cash) and their health status.”

    Darren Redmayne, head of Lincoln Pensions believes that the consultation also overlooks the health of the employer. “Advisors should be considering, especially in the current climate, whether defined benefit pension schemes will actually be able to pay the expected benefits,” he says. ”For example, if you knew your employer covenant was weak and you might not get your full benefit then you might be more likely to take a transfer.”

    Making sure that recommendations are personal, as well as issuing individual assessments of suitability is a key pillar of the proposals. However, Nathan Long Senior Pension Analyst at Hargreaves Lansdown believes there are other processes to think through before that can happen: ‘Watering down the already robust protections should not be considered at all until we at least have a standardised, simple way of displaying the correct information from defined benefit schemes,” he says, adding that this is likely to require input from the Pensions Regulator.

    While there are concerns, in general there is cautious optimism around the consultation’s proposals. “The important point,” concludes Malcolm McLean of Barnett Waddingham, “is the FCA is not dismissive of DB to DC transfers per se. In some cases the transfer can be of value to the member, taking into account other factors such as the need for income, life expectancy, family needs and so on.”

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