How many specialists does it take to make a transfer? The 'boom boom' in pension advice
No laughing matter or the advice opportunity of a generation? More than a year after the introduction of the pension freedoms, the issues around transferring from defined benefit (DB) to defined contribution (DC) schemes remain the topic of much debate. Here we discuss this growing area of interest and the regulatory backdrop, as well as the threats and opportunities for advisers.
In the retirement world of old, transferring out of so-called 'gold-plated' DB pensions would have been practically unheard of, the perceived wisdom being that their benefits could never be matched by those offered by DC schemes. Fast forward to 2015 and the introduction of the pension freedoms and this perception has been turned on its head.
For some clients the flexibility offered by the pension freedoms is very appealing. In addition, the rocketing transfer values (in light of lower interest rates and investment yields) combined with incentives from employers, have enticed unprecedented numbers of clients to seek transfer advice. This means a greater requirement for more specialised and complex advice, particularly around the value of accrued benefits, the suitability of income drawdown and the ongoing investment risks that would be shifted from the employer to the individual.
Skills and scrutiny
As we know, this is no small undertaking. The issues at play around pension transfers and decumulation are complex and challenging, and the stakes are high. There are often no second chances with retirement income. A bad decision now can make or break the lifestyle an individual had hoped to enjoy in later life. It could also negatively impact the legacy that they had planned to leave their loved ones.
So important are these issues that the Financial Conduct Authority (FCA) has stipulated that clients with more than £30,000 worth of benefits in their DB scheme must seek advice before transferring, and that any permission to transfer must be made by a qualified Pensions Transfer Specialist (PTS). What's more, the FCA has announced an overhaul of the qualifications that a PTS needs. All this underlines the need for greater skills and competency in this increasingly important area of advice.
Estimates from the FCA put the potential numbers of people requiring advice on transferring out of their DB pensions into a DC scheme at around 35,000 per year. The number of PTSs to service these clients has already risen but still falls short. So with demand significantly outstripping supply, we will likely see the number of qualified advisers rise or else there will be severe bottlenecks in servicing clients' transfer requests.
Avoiding the blame game
Understandably, advisers may feel a good deal of nervousness around providing pension transfer and decumulation advice. It is time-consuming and brings additional admin pressure and compliance risk. And what about all the other more technical challenges of decumulation – sequencing of returns, portfolio drift and volatility? Some advisers may feel out of their depth when it comes to these investment risks, of which they may have very little experience.
In addition, the regulatory framework hasn't quite caught up with legislation and in some respects there is ambiguity around who is protected – the client or adviser – when things go wrong in retirement. Could a client look to apportion blame in years to come, if they find themselves running out of money? Indeed, professional indemnity insurers appear to be growing increasingly cautious and selective in terms of the cover they offer around pension transfer advice. This suggests that they foresee an increase in related complaints as demand rises.
But with challenge comes opportunity, and some would argue that we are currently in an advice 'sweet spot'.
The advice opportunity
There are more people in the UK than ever before and around nine million of them will be moving into retirement in the next decade. These 'baby boomers' have likely enjoyed final salary pension schemes, owned property, benefited from inheritances and are living longer than any generation before them. They also bring over £700 billion of assets into the 'at retirement' market. That's more clients, with greater wealth, looking for more complex advice, so how can advisers manage this?
For those advisers who haven't done so already, now could be a perfect time to build a centralised retirement proposition. This type of commoditised offering can help advisers cope with the volume increase, segment successfully and provide dynamic investment solutions that are suitable for the specific challenges faced by their clients in decumulation.
Advisers who maintain investment management in-house, meanwhile, could find themselves struggling to balance these new pension challenges with investment research, portfolio rebalancing and withdrawals. And all the while trying to enrich client relationships. As such, many advisers are recognising the benefits of outsourcing these responsibilities to an experienced discretionary fund manager, so they can focus on the planning and advice services expected of them and the personal contact that clients value. This could feel like a big step-change for traditional advisers but rather than relinquishing control, outsourcing can actually help empower them and galvanise their businesses. Taking this approach can save costs and free up valuable time, which could be better spent with clients.
Finally, those advisers who are willing to upskill and gain the relevant qualifications to advise on pension transfers could find themselves well positioned to capture significant assets and with limited competition.
Improving the odds
The combination of game-changing pensions reforms, volatile markets and political uncertainty means it has never been more important for advisers to make sure that their businesses are fit for purpose.
At Aberdeen Standard Capital, we believe the current boom in demand for advice should be viewed as a once-in-a-generation business opportunity for advisers. Those who have scalable and repeatable processes, investment solutions in place that are appropriate for the challenges of decumulation and perhaps the support of an experienced discretionary fund manager can significantly improve their odds of succeeding. There is great potential to be harnessed and advisers who are prepared to innovate, streamline their businesses and offer high-quality decumulation investment solutions will most likely thrive – as will their clients.