Personal PensionJul 27 2016

DC versus DB: not all pension transfers are created equal

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      CPD
      Approx.30min
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      CPD
      Approx.30min

      I began writing this article a few days ago, and shortly after starting it I found myself speaking at the Retirement Money Show in London.

      The last session of the day was a chance for members of the public to pose questions to the expert panel in front of them. Perhaps not surprisingly the first pension question from the audience concerned a defined benefits transfer.

      To paraphrase, the questioner had a number of pension plans, both DB and DC, and he was looking to consolidate them for retirement planning purposes and to take control of the investments.

      He understood that he could transfer his DC pot into a Sipp, but as his DB transfer was valued in excess of £30,000 he would have to take financial advice (at a cost) before transferring it. Why was this?

      The answer from the panel was as expected – transfers from DB schemes are often not the right thing to do, and on the adviser side there is the fear of liability from insistent clients.

      The level of the fees and the demand for a one-off transaction rather than a full financial plan have also played their part in the discussions

      Advisers may, therefore, not accept the business or set costs high enough to try and discourage the business, or to cover any ongoing liability if the client insisted on proceeding with the transfer.

      The transfer conundrum

      Let us start by looking at what the Financial Conduct Authority (FCA) says in its Conduct of Business handbook (COBS 19.1.6G 08/06/2015):

      • When advising a retail client ... whether to transfer ... a firm should start by assuming that a transfer ... will not be suitable. A firm should only then consider a transfer ... if it can clearly demonstrate, on contemporary evidence, that the transfer ... is in the client’s best interests. (COBS 19.1.7G 08/06/2015)

      • When a firm advises a retail client on a pension transfer, it should consider the client’s attitude to risk including, where relevant, in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.

      • When giving a personal recommendation about a pension transfer, a firm should clearly inform the retail client about ... the consequent transfer of risk from the defined benefits pension scheme ... to the retail client.

      • Including the extent to which benefits may fall short of replicating those in the defined benefits pension scheme ...

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