Clients have more flexibility and choice when it comes to planning for their retirement – and that's undoubtedly a good thing. This has led to unprecedented demand for advice. Again, a good thing for the adviser community. Where things get really tricky though are in areas where regulation has failed to keep pace with the sweeping changes in pension legislation.
Giving with one hand
Through the pension freedoms, the UK government handed people control over their retirement savings. It introduced greater choice, allowed people to control how and when to access their pensions (from the age of 55), provided better death benefits and reduced the restrictions on who can inherit. This change in legislation was, as we know, a complete 'game changer' for all concerned.
But behind these improved pension benefits rose a whole host of investment risks that the man on the street, some advisers, and indeed the pension regulators, had not had to contend with before. This makes for some very muddy waters, particularly around the contentious issue of pensions transfers.
Regulation bringing up the rear
As we know, in order to access the full benefits of the new pension legislation, clients' retirement savings must be held in a modern, fully flexible, defined contribution (DC) plan. This has unsurprisingly led to rising interest in transferring out of so-called 'gold plated' defined benefits (DB) pensions into DC schemes. The problem is that the regulations governing this type of transaction are from the pre-pensions freedoms era, when retirement was a fairly linear journey for most clients. The regulations have barely changed since and do not embrace the many more options that clients now have at their disposal when it comes to retirement planning.
Transfer value analysis (TVA) is still the key determinant in deciding if transferring from a DB to a DC scheme is in the best interests of a client. As part of the analysis, a value is placed on a client's accrued benefits within their DB scheme, if they were to find an alternative retirement solution. Crucially, the current TVA doesn't take into account the value a client may place on the flexibility or enhanced death benefits available to a DC scheme.
The Financial Conduct Authority (FCA) has issued a policy statement on Proposed Changes to Pension Transfer Rules. It has also said that it will consider a full review of the TVA system. In the meantime, clients and advisers may feel slightly cast adrift with little clarity, guidance or protection.
One piece of newer regulation from the FCA is the requirement for clients with more than £30,000 worth of safeguarded benefits in their DB scheme to seek advice before transferring. It also requires any permission to transfer to be made by a qualified Pensions Transfer Specialist. This is providing some advisers with the opportunity to up-skill, gain relevant qualifications and move into this developing area at an early stage. It puts the specialised adviser in a privileged position but also at the heart of some very complex decision making and with a regulatory framework that is still work in progress.
The trouble with transfers
For these reasons, some advisers are wary of getting involved in pension transfers and fear that their advice could come back to haunt them if retirement for some clients doesn't play out well. That is a very difficult position for an adviser to be in when, for some clients, transferring out of a DB scheme is the right thing to do. Fear of later recriminations from the regulator is preventing some advisers from giving advice to their clients based on individual circumstance and objectives.
There is no such thing as a traditional retirement now. Clients these days have diverse retirement needs; sustainable income, access to additional income, death benefits, tax planning, flexibility and control, which may make transferring to a DC pension scheme all the more appealing. People are living very different lifestyles to even a generation ago. Clients may have blended families or unconventional home lives, aging parents to care for or school fees to cover. They may have accumulated wealth in other vehicles too, which they may prefer to use in retirement so they can leave a tax-efficient legacy. Finally, the BHS pension scandal has also reinforced some peoples' desire to take control of their own pension pots.
Advisers now need to consider all these issues when it comes to helping a client make the most of their retirement. A DB scheme provides the sustainability element that is critical for clients, while a DC scheme addresses many of the other priorities but sustainability is a significant risk. This is the pension conundrum and advisers have every right to feel apprehensive around the issue, especially given the uncertainty around who is ultimately responsible for any poor decisions.
The FCA is reviewing the way unsuitable pension transfer advice is redressed. Like TVAs, the current system for handling these types of complaints dates back to the 1990s, and is no longer fit for purpose in the new retirement landscape. Typically, any redress will depend on whether or not a client is worse off than they would have been had they not transferred. As such, the investment strategy and management of the risk associated with taking withdrawals in volatile times will be crucial in any future assessment.
Support where it's needed
For advisers, there is a huge responsibility to help their clients do the right thing. Transferring out of a DB pension is a one-off decision and, even if it is suitable for that individual client, the investment risks are ongoing once it is made. For many clients, transferring from a DB scheme and decumulating through a DC plan may well be one of the biggest financial decisions of their lives.
Those advisers who haven't outsourced investment management responsibilities will need to grapple with the continuing challenges that decumulation brings, such as sustainability, volatility and sequencing of returns. These are complex investment concepts with which an experienced discretionary fund manager can help advisers.
Outsourcing this aspect of the pension conundrum to a trusted and experienced DFM can free up vital time and resources that can be redirected towards building relationships and fully understanding clients' myriad retirement goals.