Fund flow surge at mercy of DB transfer changes

Fund flow surge at mercy of DB transfer changes
Net fund sales into Isas and pensions

A planned overhaul of defined benefit (DB) pension transfer guidelines has been tipped to affect the weight of business flowing into centralised investment propositions and asset managers’ multi-asset products.

DB transfer activity has spiked in the past 12 months, driven by record transfer valuations and the flexibility offered by the 2015 pension freedoms, shifting money from legacy propositions into personal pensions that are then typically invested into funds.

But changes proposed by the FCA in a consultation paper last week have left the industry conflicted as to whether they will accelerate or dampen the amount of transfers being made.

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Abraham Okusanya, of research firm Finalytiq, claimed the industry would “probably see fewer transfers” if the changes came into force.

“You have to do a more comprehensive financial plan [as part of the advice],” he said. 

“It signals that the FCA isn’t comfortable with the amount of transfers.”

But Graham Bentley, managing director of consultancy gbi2, said: “The FCA’s subtle change of approach acknowledges that some transfers will be advantageous financial planning strategies. If this raises the likelihood that quality advisers will be more comfortable with advising accordingly, then that will increase fund flows as cash transfers to personal pensions.”

The difference of opinion stems from the importance being placed on certain parts of the watchdog’s proposals. 

The regulator is considering removing guidance that intermediaries must always begin their analysis on the basis that a transfer would be unsuitable. But other elements, such as the need for advisers to provide a personal recommendation in each instance, have been viewed as an impediment to the process.

Funds that favour income and capital preservation have been identified as the main beneficiaries of transfer-driven flows thus far.

The head of distribution at a large asset manager, who did not wish to be named, said DB to defined contribution (DC) pension business had “held up the market” in an otherwise difficult 2016 for fund flows.

Ken Rayner, director at RSMR, said: “As more and more people understand what’s going on and the adviser community uses the rules to the advantage of their clients, we are getting increased flows.”

“We are talking about those lower-risk products like multi-asset and absolute return.”

Such products proved popular last year. Mixed-asset was the top-selling asset class of 2016, with more than £4.8bn of net inflows. Similarly, IA Targeted Absolute Return was the best-selling sector of the year.

More broadly, the trend appears to have supported flows at a time when they are dwindling elsewhere. Net fund sales within Isas for 2016 slumped to less than half of their 2015 level.

“Pension freedoms have undoubtedly had an impact upon retail fund flow,” Gill Hutchison, research director at The Adviser Centre, said. 

“The transfer value argument is naturally an important driver, increasingly so as people take advantage of the low-yield environment.”