It will be mandatory for those that wish to transfer out from a defined benefit scheme to a defined contribution scheme to seek regulated financial advice, the Treasury said today.
Chancellor George Osborne’s ministerial statement published this morning (21 July), ahead of the full consultation response later on, introduced additional safeguards to help support individuals to make more informed choices on pension transfers.
The statement flagged up that staying in a DB pension is likely to be their best option, as DB schemes offer a level of security and guaranteed indexation that DC schemes do not.
Furthermore, the transfer values offered when requesting to transfer out are often less than the net present value of the benefits that an individual would ultimately receive from their defined benefit pension.
However, for some individuals transferring out may be in their best interests, the Treasury said, however, due to the reasons above, it will be a statutory requirement to take advice from a professional financial adviser who is independent from the scheme and authorised by the Financial Conduct Authority.
At present, although the majority of DC schemes will only accept transfers if professional financial advice is taken, guidance for transfers from DB schemes only stipulates that such advice has to be taken when transfers are instigated by the employer not when they are instigated by the employee.
The FCA today published the results of its thematic review on enhanced transfer values out of DB schemes, outlining plans to follow-up individual financial advisory firms that have given bad advice to ask them to contact members and offer redress where appropriate.
DB schemes will be required to check that a member has taken advice from a professional financial adviser who is independent from the scheme and authorised by the FCA before allowing a transfer out of the scheme.
In most cases the individual pension member will need to pay for the financial advice.
However, responsibility for paying for the financial advice will fall on the employer if the transfer is from DB to DC within the same scheme, or as a result of an employer led incentive exercise.
The requirement for professional financial advice would not apply to small pot holders with pension savings below £30,000 as the trivial commutation rules would still apply.
The proposal was recommended by a large number of stakeholders during the consultation period and has been welcomed by the market this morning, with the Association of British Insurers director general Otto Thoresen stating that “maintaining the flexibility to transfer from DB to DC is the right decision.”
However, Mark Wood, chief executive at JLT Employee Benefits, warned of the burden on pension scheme trustees to make sure members have taken advice.
He said: “Many DB schemes have tens of thousands of members and checks of this type are likely to lead to higher administration costs.”
Malcolm McLean, consultant at Barnett Waddingham, pointed out that trustees will have the right to delay transfers or restrict the level of the transfer value where the scheme is underfunded or the transfer would seriously jeopardise the scheme’s overall funding position.
“There is also to be consultation as to whether funded DB schemes could be allowed to operate like DC and give individuals access to their funds without the need to transfer out to a DC arrangement,” he stated, adding that “The full implications of this need to be carefully considered before proceeding.”
David Trenner, technical director at retirement income specialists Intelligent Pensions said: “Members will know that there are many long term considerations and transferring is not just about spurious advantages or questionable investment opportunities promoted by the latest Ucis salesman!
“However, we are concerned that anti-avoidance measures associated with the reforms may be a further, unwelcome, burden on the administration of a large number of pension schemes.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, agreed with the decision to allow DB pension transfers to continue.
He said: “However our experience in this market shows that for the majority of scheme members the best advice is to not transfer.
“The cost of getting good advice will be hundreds or in some cases thousands of pounds, so investors should think carefully about whether they really want to give up their scheme guarantees before paying an adviser a fee to look into it for them.”
