Defined Benefit transfer recommendations - Media article

hugheskevi

An interesting article in Professional Pensions today.

A few selected highlights:

The FCA will carry out further work on defined benefit (DB) transfers after it revealed "concerning and disappointing" findings from its marketwide data gathering exercise.

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The FCA said the results made for "concerning and disappointing" reading because it found firms are recommending large numbers of DB transfers, despite the regulator's stance that transfers are likely to be unsuitable for most clients.

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It said 234,951 scheme members received transfer advice, and of those, 162,047 (69%) were recommended to transfer out, while 72,904 had been advised to stay in their scheme.

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The total value of DB pensions where transfer advice had been provided was £82.8bn, with an average transfer value of £352,303.

FCA executive director of supervision, wholesale and specialists Megan Butler left no uncertainty as to the regulator's feelings on the data it uncovered.

"We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable," she said. "It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.

"Deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make and it is vital customers get high quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market."

DairyQueen

It would be interesting to see a breakdown of cases by, say, 6 month periods. I note that they were reviewing April 2015 thru Sep 2018. I would guess that the numbers have decreased substantially since the beginning of 2018.

anselld

Suspect the data is heavily skewed since due to the relatively high cost of such advice people will only seek the advice in the first place if they think there is a reasonable chance it will give them the answer they want.

Thrugelmir

The longer that gilt yields have bumped along the bottom. The greater the attraction of taking the (increasing) CETV and surfing the markets has become. Many investors are simply over confident in their own abilities and do not have sufficient respect for the role that chance plays in financial markets. An insistent client will always find someone willing to undertake their command.

Silvertabby

You'd think that people wouldn't transfer out of the LGPS because of the low cetv factors ( less than 20 times pension given up is not unusual) but people do. Lets just say that most of these go through one of the 'pensions advice' firms set up since pension freedoms, rather than an IFA.

molerat

At least it will give the PPI companies a new lease of life (along with Equity Release)

hyubh

hugheskevi wrote: »

FCA executive director of supervision, wholesale and specialists Megan Butler left no uncertainty as to the regulator's feelings on the data it uncovered.

"We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable," she said. "It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.

"Deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make and it is vital customers get high quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market."

Personally - I don't think it is a regulator's place to publicly adopt this sort of opinionated stance. It is akin to advocating a ban on transfers out of DB schemes to DC arrangements full stop. Nothing wrong with advocating such a ban, however doing so is a political act, not an administrative one.

Perhaps it (very paternalistically) upholds the 'real interests' of those wanting to transfer out, but it also goes against the interests of those who don't. Admittedly, this put things simplistically, but for a private sector scheme, the more transfers out, the more the encouragement for explicit derisking efforts and so the closer to buyout with an insurer.

JoeCrystal

Frankly, every person who opted for a DB pension transfer knew exactly the risk. If it goes belly up, well, tough luck. My only concern is that such people may be compensated for doing such things, so getting even more money.

DairyQueen

JoeCrystal wrote: »

Frankly, every person who opted for a DB pension transfer knew exactly the risk. If it goes belly up, well, tough luck. My only concern is that such people may be compensated for doing such things, so getting even more money.

I am one of such people. I know the risk. If it goes 'belly-up' I won't be seeking compensation. I was correctly advised to transfer and I have no regrets. Nor will I have regrets when the market crashes. I am prepared for that certainty.

The issue for the regulator is that many who transfer appear not to have understood the risks, and there are risks and benefits either way.

There are a bunch of threads on this forum that illustrate exactly that. Some posters 'get it' after reading responses, others don't. Some 'get it' after taking advice, some don't. Those that don't will be moaning on here when, e.g., the markets crash (those who have transferred), or inflation rises (those whose DB schemes have limited inflation protection).

The data suggests that people are not receiving the correct advice, or are not understanding the advice. Some are blinded by the numbers. Some are in denial about the risks. Many are confused by the unfamiliar terminology. Some underestimate the task they are taking on and/or overestimate their ability, or they can't see the value in paying for ongoing management, or they don't understand the benefits and limitations of their DB scheme.

In principle, the option to transfer is a good thing. The process has been designed to support adults making informed decisions. The problem is that the process isn't working. Many are not making informed decisions. Why? Poor advice? Ignoring good advice? Not understanding the advice?

I don't know the answers but I don't believe it is reasonable to assume that every transfer-out is an informed decision, or a wrong decision. Nor is it correct to assume that DB schemes are risk-free, or minus disadvantages. My circumstances are an exemplar for transferring. My family will benefit regardless of how the markets perform, regardless of inflation, and regardless of whether I exceed my (reduced) life expectancy.

Malthusian

hyubh wrote: »

Personally - I don't think it is a regulator's place to publicly adopt this sort of opinionated stance. It is akin to advocating a ban on transfers out of DB schemes to DC arrangements full stop.

No it isn't. "A transfer from DB to DC is unsuitable until proven otherwise" is not the same as "All transfers from DB to DC are unsuitable".

If the adviser can prove that it is otherwise, there is no problem. That is the adviser's job.

If they can't do it the punter should not transfer.

When Option A involves guarantees and Option B does not, and when Option A gives you something that you will never be able to buy again on the open market and Option B does not, and when Option B is irreversible and final whereas if you change your mind about Option A you can switch to Option B any time you like, then it is screamingly obvious that the presumption should be for Option A until you can prove that jumping off the cliff into Option B is better. Anyone who pretends not to understand this is suspect and should not be consulted about DB transfers.

JoeCrystal wrote: »

Frankly, every person who opted for a DB pension transfer knew exactly the risk.

That is pretty unlikely.

Plenty of them will have been fed a load of junk about how Cape Verde storage pods and dilapidated monasteries outside Leipzig will give them a much better income than their DB scheme, and their DB scheme is about to go bust so they should get out while they can, and other such crap.

jimi_man

DairyQueen wrote: »

In principle, the option to transfer is a good thing. The process has been designed to support adults making informed decisions. The problem is that the process isn't working. Many are not making informed decisions. Why? Poor advice? Ignoring good advice? Not understanding the advice?

I disagree that it's a good thing. If the idea is that, by and large, transfers are not recommended then it's a daft idea to bring in a process that allows people to do this. People are always going to be seduced by money, so irrespective of the value of the CETV they'll just think that it sounds a lot. £1 million in a pot sounds infinitely more attractive than £30,000 a year index linked with spousal benefits. And yet I bet the second is more valuable.

I read loads of these threads on here and I haven't read one yet that says 'yes, probably a good idea', they all make me want to cry out 'don't do it!' Everyone seems keen to justify to the world why they think it's a good idea for them.

It's another PPI/Endowment mortgage fiasco that will come back to bite us in the xxxx a few years down the line, which ultimately we'll have to pay for in some form - purely because of people's greed. The trouble is that everyone wants instant gratification these days, they want £xxxxxx in a pot now rather than the slow and steady DB option.

It shouldn't have been brought in and personally i think the FCA director hasn't gone anywhere near far enough. Personal choice is not always a good thing and definitely not here.