How to spot potential issues and work around them

Knowing where potential issues may arise, what the laws allow and where there may be regulatory exemptions, is therefore important.

This is especially the case where defined benefit (DB) to defined contribution (DC) transfers are concerned.

As Neil MacGillivray, head of technical support at James Hay, comments: “Out of the vast number of DB to DC transfer requests, only a few will be justifiable from an advice perspective.

“Advisers will need to be confident they have looked at all aspects and alternative solutions, and that the advice to transfer is watertight. The last thing the industry needs is another pensions transfer scandal.”

Duty to members

For non-DB schemes, the Pension Schemes Act 2015 makes allowance for managers to act in the best interests of their pension scheme members, even allowing the managers to override legislation in order to help members.

So for advisers whose clients are in a shared risk scheme or defined contribution scheme, under which any of the benefits that may be provided are collective benefits, this could be a useful ruling to cite if providers are reluctant to allow the flexibilities that pension freedoms allow.

Section 37 of the Pension Schemes Act 2015 says: “The Secretary of state may by regulations impose a duty on the managers of a relevant non-trust based scheme to act in the best interests of members when taking decisions of a specified decision.

Investment markets are unpredictable and not everyone will always be better off when they retire, but this cannot be the test of whether the advice given was appropriate at the time Steven Cameron

“Regulations under this section may provide for the duty to act in the best intersts of members to override obligations that are inconsistent with that duty (including obligations imposed by any legilative provision, rule of law or provision of a scheme or other instrument.

“This may provide for the consequences of a manager breaching the duty to act in the best interests of members to be the same as the consequences of breaching a fiducary duty owed by the manager to the members.”

This is a helpful piece of legislation to bear in mind with shared risk or DC schemes - but the legislation does not yet allow ‘duty to act in the best interests of members’ with regards to defined benefits schemes.

Specialism

Having the appropriate specialist permission for DB to DC transfers is paramount. This would require advisers to sit AF3 - the pension transfer exam.

The Financial Conduct Authority’s (FCA)’s pension transfer rules stipulate to do a DB transfer, one must have a specialist permission - the Pensions Transfer Specialist (PTS).

The FCA’s Sourcebook defines a specialist as: “an individual appointed by a firm to check the suitability of a pension transfer, pension conversion or pension opt-out who has passed the required examinations as specified in the Training and Competence Sourcebook”.

The breakdown of what is required of a PTS is outlined in the Prudential graphic below.

This came into force when the government amended its Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

This made advising on conversions or transfers of safeguarded benefits to flexible benefits a specified activity, to be regulated by the FCA. It brought advice on transfers from DB schemes to occupational DC schemes within the FCA’s remit, meaning the regulator had to incorporate the new specified activity within its rules.

The FCA’s March 2015 consultation paper CP15/7 on pension transfers said: “The Government’s new flexible pension regime will make advising on pension transfers significantly more complex, so we now wish to require the Pension Transfer Specialist qualification for advice on all transfers from DB schemes to DC arrangements, regardless of when the transferred benefits are being crystallised.”

The FCA therefore incorporated the transfer aspect of the new specified activity by adding the relevant part of Article 53E to its existing definition of ‘pension transfer’ in the Handbook glossary.

According to Bob Scott, chairman of the Association of Consulting Actuaries: “Despite the suggestion that requiring advisers to have a PTS would mean fewer advisers are prepared to advise on these transfers, what we have actually seen is record numbers completing the Pension Transfer Exam (AF3).

“The upskilling of advisers carrying out this work can, in my opinion, only be seen as a positive step for industry and consumers alike.

“Advisers yet to obtain the qualification or who have decided not to advise on this business can help clients by referring or introducing a PTS into the process to carry out that specific piece of advice.”

Mexican stand-offs

Yet advisers, providers and trustees have been engaged in some strange Mexican-style standoffs over the interpretation of ‘who is a specialist’ under the DB transfer rules.

Any adviser referring a customer should make sure they undertake the necessary due diligence on the company Bob Scott

For example, one adviser who is not a PTS, works with a local advisory firm which is a PTS.

This is acceptable under the Financial Conduct Authority’s Conduct of Business Sourcebook (COBS) section 19.1, ‘Pension transfers, conversions and opt-outs’, which summarises how to prepare and provde a transfer analysis in line with regulatory rules.

In Cobs 19.1.1, the FCA states: “If an individual who is not a pension transfer specialist gives advice or a personal recommendation about a pension transfer, a pension conversion, or pension opt-out on a firm’s behalf, the firm must ensure the recommendation or advice is checked by a pension transfer specialist.”

Yet even where advisers have got their DB to DC transfer recommendations checked by a PTS, some scheme managers still refuse to budge for fear of comeback later down the line.

Also, advisers should be aware even if the advice is checked by a specialist, this does not absolve the primary adviser from the regulatory responsibility.

As Mr Scott adds: “Any adviser referring a customer should make sure they undertake the necessary due diligence on the company and have a clearly defined handover process.”

Claire Trott, head of pensions technical for Talbot and Muir, comments: “There has been very little additional guidance given on pension transfers to advisers, although they did received some with respect to insistent clients and how to deal with them.

“The insistent client still continues to be a big issue for advisers and providers alike. Many providers won’t accept a DB transfer if they are an insistent client and many advisers do not want to recommend DB transfers unless there is an incredibly strong reason to do so.

“The history surrounding DB transfers and the Pension Review of the 1990s and early 2000s is still in the forefront of advisers minds.”

Special situations

There may be some policies that do not require a PTS, but the FCA will still require a firm to have a pension transfer permission.

PS 15/12, on permissions and grandfathering, states the FCA is excluding some policies from the requirement for a PTS. The FCA may also consider granting pension transfer permissions with limitations in certain circumstances (see Figure 1).

Figure 1:

Presumed prescriptions

Moreover, according to Mike Morrison, head of platform technical at AJBell, the regulatory presumption is that a transfer will not be suitable due to the foregoing of the guaranteed benefits of a DB pension’s guaranteed benefits.

“This could well be the right option but does not take into account all of the client’s circumstances, such as the shape of the benefits and the access to the benefits.”

For example, he comments on the flexibilities which DC members enjoy, which could be attractive to certain DB clients.

He says: “In the new world, there is freedom for DC but not for DB. DB can be inflexible with regards to what benefits are taken, and the mix of benefits available.

“The issue of death benefits is also important. The inheritance tax rules are more advantageous for DC than they used to be, but DB schemes have restrictions around how they provide such benefits.

“So there are legitmate reasons why someone might want to transfer from DB to DC but if their cash equivalent transfer value is worth more than £30,000, they are forced to seek advice.”

Cost of getting specialist advice

Under Chapter 2, section 48 of the Pension Schemes Act 2015, the rules about “appropriate independent advice” in respect of conversions and transfers apply to both members and to survivors of members.

The Secretary of State could create an exception in the case of a member or survivor whose “subsisting rights in respect of safeguarded benefits under the scheme, or safeguarded benefits under the scheme and any other scheme, are worth less than a specified amount”.

The specified amount under the FCA’s pension transfer rules have set this amount at less than £30,000.

Yet advice costs money and advice is not always easy to find.

AJ Bell’s Mr Morisson points out: “The concerns about transfers from DB to DC are well understood by advisers, with the loss of safeguarded or guaranteed benefits and the transfer of investment risk to the individual being at the forefront of mind.

“These are important considerations so we have ended up in a place where financial advice on DB to DC transfers can be valuable to investors, but for one reason or another that advice is hard to find.

“Given the advice risk that exists around DB to DC transfers, some advisers are put off advising on them completely, or the cost associated with the advice is too high for the client.”

Steven Cameron, pensions director at Aegon, adds: “We support reviewing regulation so we have recognised standards of what should be taken into account, and how. This is the best way of protecting customers and advisers.

“We must not leave advisers open to having their advice challenged in retrospect. Investment markets are unpredictable and not everyone will always be better off when they retire, but this cannot be the test of whether the advice given was appropriate at the time.”