One of these changes includes a minimum three-month freeze by The Pensions Regulator on transfers out of defined benefit schemes.
While the proposed measure is designed to protect individuals from playing with their pensions at a crucial time, opinion in the industry is divided on whether this will actually slow down transfers to defined contribution schemes. Why is that the case?
Guidance
The regulator published guidance at the end of March allowing DB schemes to delay by up to three months member requests to transfer out. But many commentators in the industry point out that the guidance is not mandatory and therefore question whether the measure will actually protect people from transferring out of their DB schemes.
Key Points
- There is a three-month freeze on pension transfers
- The FCA has also delayed its rules banning contingent charging
- The freeze on transfers could be bad news for people who need quick access to their money
Andrew Tully, technical director at Canada Life, says: “I think it’s very difficult to be sure how and when trustees will respond.
“While The Pensions Regulator is allowing schemes to delay transfers, it isn’t mandatory, so some schemes may decide to continue to allow transfers, while others may stop them for future requests.”
He adds: “Some may stop for all, including cases where transfer values have previously been quoted. It creates uncertainty for advisers, clients and schemes.”
Mark Barlow, partner at XPS Pensions Group, echoes this view. He says: “It is now clear that trustees have the option to temporarily suspend transfer values where they need to take advice around transfer value terms or put in place support for members.”
Mr Barlow expects some pension scheme trustees will consider suspending transfer values following TPR’s guidance, but most will be comfortable in continuing to quote this option to members.
“The funding positions of many of our pension schemes have been reasonably well-protected against this recent downturn and so have been able to continue quoting transfer values as normal. Only around 20 per cent of our clients have suspended transfer value quotations, so we don’t believe there will be a wide-ranging market impact from this.,” he adds.
Impact on furloughed employees
Some in the industry highlight that transferring out of DB schemes may be beneficial for those who are in dire need of money, including vulnerable clients or those who are facing the prospects of being furloughed as a result of this crisis.
Penny Cogher, pensions partner at Irwin Mitchell, says: “If [furloughed employees] stay in the DB schemes, they may not be able to access [the pension funds] without the trust’s and employee consent.”
“They might have wanted to go ahead with the transfer to a DC scheme because they are worried about the dependant’s pension as some DB schemes are limited... some may not recognise who gets a spouse’s pension on the death of a member,” Ms Cogher adds.
This concern is also voiced by Ricky Chan, chartered financial planner and director at IFS Wealth & Pensions.
“Naturally this would mean a large fall in DB transfer cases. This could result in increased frustration to clients, particularly as some may have been needing access to their pensions early for cash flow or other purposes, especially in light of potential redundancies or loss of business,” he says.
Transfer values
One of the main reasons for the delay in transfer of schemes is to give trustees more time to calculate the cash equivalent transfer values amid fluctuating markets.
A CETV is the cash value of an individual’s pension benefits. The figure is the total amount available to transfer to an alternative plan in exchange for forfeiting rights under the scheme.
Mr Chan says: “It gives [trustees] extra time to reconsider whether they’re happy to accept the investment risk involved, as many who have transferred recently would have seen falls in their pension fund.”
But Ms Cogher says: “Most trustees take actuarial advice and most of [the transfer values] were fixed before coronavirus. This means they won’t take account of market volatility; they were higher assets, it would reflect the adjustments.”
She adds: “They have the next three months to figure, but often trustees only meet every three months, so this could be further delayed until there is a bit of stability.”
However, Mr Chan highlights: “If CETVs are unchanged from before the market falls, investing now or phasing-in investments over the coming couple of months could be a good opportunity to buy into the markets at a relatively lower price, as the markets have fallen.”
Contingent charging
The Financial Conduct Authority’s decision to delay the ban on contingent charging has also received a mixed response from the industry.
Contingent charging is when companies charge more for advice to transfer than advice not to transfer, creating a bias to recommend a transfer.
While Mr Tully supports the ban overall, he cautions that not all transfers will be against clients’ best interests in the current situation.
“It is still likely we will see a ban on contingent charging, but later than originally envisaged.
“While it is right we have strong controls and scrutiny of transfers, we need to be careful not to demonise all transfers and those involved in them.”
Mr Tully adds: “Otherwise we run the risk of stopping people exercising control over their pension savings, and preventing some from achieving the best outcome.”
Mr Chan does not support the banning of contingent charging and highlights that the delay may actually mean less wealthy clients may still be able to access advice.
“I’ve never been a fan of the regulator adding more red tape and micro-managing businesses, including how charges should be applied. I do think the delay could mean more modest clients are able to access DB transfer advice,” he adds.
All in all, the mood across the industry is that the delay could help trustees calculate transfer values more correctly and prevent members from making rash decisions, but commentators stress that transfers should really only be done if absolutely necessary.
Saloni Sardana is a former features writer at FTAdviser and Financial Adviser
