Defined benefit pension regulation should keep pace with regulatory change in the rest of the industry, according to Standard Life Wealth’s head of business development.
Ronnie Binnie told Financial Adviser the pension freedoms, which came into effect on 6 April 2015, heralded a bright new future for retirement planning, with demand for advice increasing around defined benefit to defined contribution transfers.
“This shouldn’t be a surprise, as people will be attracted to the access to potential additional income, the higher death benefits, the flexibility around the shape of the benefits and the control that is now available.”
He said DB transfers were not necessarily always good, but any advice should be based on personal circumstances. “This is where there is possibly some contradiction around the government’s aims for pensions freedom and the FCA’s views on how transfers should be regulated.”
Mr Binnie said the rules when considering a DB transfer – where a client must seek advice if assets were above £30,000 – are good because they ensure the pros and cons are assessed for each individual client.
“However, the scheme transfer value and accompanying scheme benefits must be assessed by a transfer value analysis system.
“Again, the theory is sound, but these assessments are designed to provide a critical yield (an annualised investment return) that will be needed to provide an equivalent level of pension in the new arrangement.
“This is where the theory and the practice don’t work,” he stated, adding from experience, the majority of people looking at transferring DB benefits are doing so because they want a different shape to how they are taken.
Scott Gallacher, chartered financial planner at Leicester-based Rowley Turton, said the government wants people to be able to make an informed decision so they are not mis-sold a transfer out of their DB scheme. He claimed there were two key problems with the current system.
“Firstly, the cash equivalent transfer values offered by final salary pension schemes are invariably lower than the fair value of the benefits. The government’s and regulator’s view that transfers from DB schemes are bad would perhaps be better viewed as evidence that CETVs are too low, rather than that transfers are inherently bad.
“Secondly, while transfer value analysis reports are a good starting point, they are arguably crushing the ability of advisers to be able to recommend the flexibility of drawdown, for fear of being crucified by Fos, should the client later choose to complain.”
Robert Lewis, director at Flintshire-based Heritage Financial Solutions, said: “Where is the value of a dependents pension where all the kids are grown up and there is no serving spouse? Any inheritance value of the final salary pot would disappear on death.
“I also agree that a transfer should be more than just a critical yield exercise, but we do have to take guidance from the FCA, it will be interesting if they move from their current stance.”
ruth.gillbe@ft.com
