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DB transfers can be an emotive subject for trustees, who have to walk the tightrope of giving members choice whilst protecting them from making poor decisions. How are trustees currently solving this problem – and is it becoming more or less difficult?
To have an IFA or not to have an IFA
Just as DB transfer values hit another high and trustees are slowly getting used to the idea of putting in place a trusted financial adviser for members, one of these firms is leaving the market - without explanation but apparently with the involvement of the FCA, leaving trustees to wonder about the right approach to transfers once more.
The news on Monday that financial advisory firm LEBC has agreed with the FCA to change its regulatory permissions means there are even fewer IFA firms capable of delivering advice for members of pension schemes in bulk, through a contract with the sponsor or trustees.
Trustees caught between a rock and a hard place
As news like this and an ongoing discussion and consultation around banning contingent charging keep making headlines, many trustees still struggle with the idea of DB transfers.
“On one hand we are very much in favour of member choice,” says Huw Evans, director at Bestrustees. But there is "still a concern about how members make decisions they may regret”.
Members looking at six or even seven-digit figures could easily be led to believe that a transfer would be a good idea, and Evans says trustees are also feeling under pressure from advisers.
Giving members access to a competent adviser can both help members and reduce the risk of rectification later, he says. But trustees might be picking up the pieces one way or the other.
Is DB transfer advice a lose-lose situation for trustees?
Depending on what emerges around the reasons for LEBC’s withdrawal from the market, schemes that have used the firm for their members could be left wondering if this is what has just happened to them – they are left to pick up the pieces.
To see one of the biggest players in this market stop not just new but also ongoing business “is quite a worry”, says Evans, who points out that the news was apparently not anticipated by institutional advisers who help trustees pick such firms.
“They say, 'We can help you do due diligence on IFAs', but they didn’t see this,” he argues, which for him “rings alarm bells” on the kind of due diligence that was undertaken.
But it is not yet clear what effect LEBC’s decision will have on trustees’ general view around IFAs. Many trustees currently still feel that having an IFA for members is preferable to leaving them to find advice on the high street.
“Two or three years ago trustees felt our job was to pay the benefits that were promised,” says Michael Chatterton, managing director of professional trustee firm Law Debenture, but with freedom and choice and a “greater appreciation of what that means” he says maybe all DB members should have this option.
Chatterton says he was impressed by the IFAs he helped appoint for two of his schemes this year. He believes that in general it would be in members’ best interest to stay in the scheme and draw the benefit but adds that for a significant minority, a transfer would be in their best interest.
Both of his schemes that appointed an IFA had seen significant numbers of members being advised by advisers on the high street. “It seemed recommendations went from member to member. We... weren’t clear the quality of advice was what we wanted it to be,” he says.
Decision is irreversible
The fact many trustees have witnessed poor decision-making by members, or even suspicious activity means they often remain nervous about transfers.
Hugh Nolan, senior trustee representative at Dalriada, says trustees try their best to protect members but "trustees are legally obliged to offer transfer values to members and can’t block them even where they have a reasonable suspicion that the member is likely to be defrauded after the transfer proceeds".
Michael Clark, managing director of CBC Pension Services, recalls a case where the transfer value was worse for the member even than an early retirement pension, but the member still took it. “Everyone has the right to make bad decisions but we try to help them make the best,” he says.
For Clark, the fact a transfer decision can’t be reversed means it cannot be compared to switching an energy or phone provider as pensions minister Guy Opperman suggested earlier this year. “This is a decision members can make once, and once only."
Transfers drop off despite record TVs
While ost trustees appear to be cautious about transfers, there is perhaps a growing variety of views, with some getting used to the idea of member choice, treating it almost like a DC retirement decision.
LCP partner Bart Huby, says regulation has helped to make members aware of what they are giving up.
The introduction of a transfer value comparator last October – which means advisers have to show a member’s transfer value together with the cost of replacing their DB income with an annuity – has meant that particularly under-50s are less likely to take a transfer than they were a year ago. Only 6% of the quotes issued to members under 50 in Q4 2018 were paid out, compared with 20% in the same quarter for the previous year, according to LCP.
Pension transfers will never dry up completely, believes Huby. But it could become much harder for members to find advice when they need it, especially for those with smaller pensions - and for trustees to find advisers they can point their members to, with an already small market having lost another provider.
How is trustees’ approach to DB transfers changing?