And so the great pensions freedom panic has begun. From across the country come reports of pension savers determined to get their hands on their pension cash, inundating nervous advisers and providers with strident requests to transfer.
So intense has been the pressure on some advisory and pension firms in the past two months that the FCA has stepped in to issue guidelines on insistent transfers. This is surprising in itself as until June, the FCA did not recognise the concept of an insistent transfer. These requests are nothing new to many in financial services but now that they have official status, will advisers and providers have the courage to deliver the freedoms that individuals have been promised – whether they consider it good for the client or not?
The FCA’s guidelines to advisers boil down to this: make sure the client understands you are advising against the transaction and the reasons why, outline the risks of their intended action and outline the range of options or alternatives they could consider.
With that done, there is no reason why an adviser who has advised against a transaction cannot then go on to help the client achieve their aim and charge a fee for doing so. Some advisers have already recognised the fear-factor among their peers as an opportunity to take on business that others do not want. The regulator’s guidelines come in the form of a three-page fact sheet which is both thin and lacking in real detail. But it is nonetheless a helpful FAQ which should give advisers more confidence in the process. What it will not do is ease providers’ concerns.
Just as consumer websites and forums have been inundated with examples of advisers refusing to transact business against their advice for fear of losing their livelihood some years down the road as a result of a complaint, many pension providers have been equally unwilling to help. Tales of lengthy delays for transfer quotations, uncertainty as to what is and what is not allowed, unclear internal policies and requirements to switch to a different policy at significant costs, have been widespread.
Beyond the barriers
Some providers seem to be putting up barriers in order to dissuade customers from moving out, or perhaps to buy time while they work out what to do. Given that the insurers have had months to prepare for the new regime they should not have been caught out by the sudden rush of requests from their customers. The FCA has stepped in to provide guidance to advisers to clarify their legal position – they clearly need to do more to engage with providers in order to make sure the freedoms that have been promised members in theory can be delivered in practice. Whether that comes in the form of further written guidance, a quiet word or a clip round the ear is up to them to judge.
Insurers should be careful to avoid being so risk-adverse in their reluctance to hand over cash that they find themselves in breach of the new consumer regulations. Angry, complaining customers are a recipe for legal problems for any financial institution. Liquidating their pension may be a decision they come to regret in the future, but right now they are angry because providers and advisers will not help them to do it; that is the risk all should be focused on.
But in among the excitement of the freedoms, many advisers may have forgotten that there are often good reasons why consumers might want to take more direct control over their retirement savings; even transferring from a gold-plated defined benefit pension to a defined contribution pension which gives them greater access to cash and more control over their savings.
There have always been situations where this is true and even risk-adverse advisers should not turn away business blindly. Many of the examples that have put the frighteners up advisers in recent months have involved 55 year olds asking to pull out cash from their pensions well before they plan to retire in order to fund immediate cash needs, such as a building development or deposit for a new house.
To those individuals, this immediate need seems a much better use for their money and is itself an investment. But being so far away from retirement, it is very difficult for the maths to come back with a positive recommendation to transfer from DB to DC. All that glitters is not gold, however, and many DB schemes can be particularly mean when it comes to cash lump sums.
Near to retirement there is a window where a DB to DC transfer really does look appealing; particularly if the individual has no need for the bells and whistles (such as spouse’s pension) which are priced into their DB pension, and if they want to leave something meaningful for their children or other beneficiary to inherit.
It is not unusual for advisers to find that a positive recommendation is possible, in which the member gets more cash up front, along with a healthy pot that can be annuitised or left in drawdown and available to be inherited. This has always been the case – the new freedom rules have simply attracted more attention to the area.
Sizeable shift
Anecdotal evidence suggests that DB scheme trustees, having seen a number of requests for transfer quotations before the new rules came into play, are now seeing actual transfers taking place, and sizeable ones at that. This suggests that advisers in these cases are making positive recommendations, not least because many incoming DC providers are still refusing to accept transfers without a clear ‘yes’ from their adviser.
There seems little doubt that the FCA, under the watchful eye of the government’s new pensions minister, Ros Altmann, is determined to make the pensions market as free and flexible in practice as it was supposed to be in theory. In June they tidied up and clarified the transfer process in a number of areas, including taking on board responsibility for regulating DB to occupational DC transfers for the first time and clarifying the scenarios in which a transfer specialist is required.
The message to the industry from the authorities so far has been a relatively gentle “don’t rip off consumers but help them to make use of the freedoms if that is what they want to do”. If the industry continues to block access to these freedoms, the message will become increasingly unsubtle. Ros Altmann is not known for mincing her words.
Bob Campion is head of institutional business at Charles Stanley Pan Asset Capital Management
