1. The FCA's attitude to and guidance on pension transfers
2. The pros and cons of a pension transfer
3. How to deal with clients who insist on a DB transfer
PRESENTER: There are some big transfer values available for those moving out of DB schemes, but are those pots of money quite as attractive as they look to clients or indeed to advisers that get involved? In this Akademia unit, we’re going to be looking in more detail at the issue. On the panel are Sir Steve Webb, Director of Policy at Royal London; Vince Smith-Hughes, Director of Specialist Business Support at the Prudential; and Justin Corliss, Business Development Manager at Royal London. Now, there are three key learning outcomes to cover: the FCA’s attitude to and guidance on pension transfers; the pros and cons of a pension transfer; and how to deal with clients who insist on taking a DB transfer. Well, when they came into the studio, I began by asking Steve Webb why DB transfers are becoming such a high profile issue right now.
STEVE WEBB: I think two things have come together to stimulate interest in transfers. One is very low interest rates. The flipside of which is very high transfer values. So if you’re going to be offered a sum of money bigger than the value of your house you’re going to be interested. And the second thing is the freedom to do what you want with it. So post-pension freedoms, you transfer the money across, and you have a whole range of flexibilities; whereas in the past you’d have taken your DB pension, probably at scheme pension age, fixed income until you die, suddenly you’ve got a whole range of choices. So a big impressive cost, you know, the cost of the scheme value to the member, and some choices, together is a pretty powerful combination.
PRESENTER: And Vince, DB pensions aren’t getting the best press at the moment. I mean there’s quite a lot of headlines about schemes that aren’t paying out as much money as perhaps the members wanted. How does that fit into the picture?
VINCE SMITH-HUGHES: Well I think the market’s been driven by a couple of things, as Steve has alluded to. So you’ve got very high transfer values, but you’ve also got this ability to take money under the pension freedom rules. And let’s be fair, a lot of people are looking at their transfer values and even for relatively modest earners it might be £400,000 or £500,000, that’s an awful lot of money to people, and you can’t help but understand the fact that they’re very interested in moving across into an area where they could take that as they want to.
PRESENTER: But is it, Justin, a bigger market, say, than it was say five/ten years ago; are there any figures that you’ve got around it?
JUSTIN CORLISS: It is a much bigger market than it was. I don’t have specific figures here available at the moment, but a lot of it is bred as we’ve just said from the pension freedoms, and particularly that lack of requirement to annuitise at 75, and that really adds to that intergenerational pension concept that people are so interested in, being able to pass this money on to people, to their beneficiaries in the future.
PRESENTER: Well let’s pick up on the low interest rate point first of all. Steve, if someone offered you a figure of £500,000, I mean is that actually a big figure or is it not quite as big a figure as it might seem?
STEVE WEBB: There is a danger that we are seduced by a very large lump sum. People do tend to underestimate how long they’re going to live. And particularly if you’re talking about for example taking a pension at 60, you might be still around on average well into your late 80s, and people with bigger pension pots and DB pensions tend to live longer than other people on average. So if you divide this number through by 25 to 30 that’s the kind of annual figure that it’s equivalent to. So yes people are being offered 25 to 30 times the value of their annual pension, but it does have to last them potentially three decades or even more. So they do have to be slightly careful and of course take good advice.
PRESENTER: Well, Vince, I think you’ve got a slide on this. So the crucial issue is it might be a big pot of capital but how much income does it buy and for how long? Can you talk us through that?
VINCE SMITH-HUGHES: Yes, absolutely, and I guess to start off it wasn’t that long ago we were all referring to defined benefit schemes as gold plated schemes, and we don’t use that terminology anymore, but actually they still are. They still provide that absolutely guarantee running into, for people’s retirement for as long as they live. So what do you need to do as an adviser? Well I would say the first thing you need to do is have a look at what’s the situation in terms of sustainability of income? So you can see our retirement modeller slide here. This is an example of someone who’s got a transfer value, and what we’ve tried to do here is compare it with what they might reasonably have got from a defined benefit scheme for that transfer.
What you can see is they’re actually running out of money at about age 91 on these assumptions - whereas again we also show longevity on this graph - and they’ve still got somewhere between a 25% and a 50% chance of still being alive at that point. And I think that really brings it home to me the importance of making sure that clients are going to have an income in retirement. Of course that’s made easy if they’ve got income from other sources, but it’s an absolutely critical point that an adviser should be looking at.
PRESENTER: And Vince, you were talking about starting to run out of money at 91. I mean many people would say at 91 you won’t be spending much anyway, does it matter?
VINCE SMITH-HUGHES: Well, who knows? There’s a lot of people who are still very active much later in retirement, certainly compared with previous years, but also you’ve got to take into account the fact that people may need that money to be in a nursing home later on in life. So to make the assumption that later in life you won’t need to spend so much, yes that will be true for some people, but certainly not for everybody.
PRESENTER: And then moving on to freedoms, Justin, I mean it’s great having all of those freedoms, but is there a danger it’s giving you enough rope to hang yourself with?
JUSTIN CORLISS: Yes well, it certainly can be, and it won’t necessarily be the right answer for all people, but for some people it will be very much the right answer. But I think you’ve touched on it quite well that we need to ensure that people have enough secure income to satisfy their essential needs throughout retirement. And if we can demonstrate that that has been achieved then obviously pension freedoms do give a lot of flexibility that people will thoroughly enjoy.
PRESENTER: Now, Vince, you were mentioning there DB as seen in the old days as gold plated. Can you talk us through what some of the benefits of DB are, some of the reasons you might not want to move out?
VINCE SMITH-HUGHES: Well I mean obviously you’ve got that income level guaranteed throughout the whole of your life. You’ve typically got some form of increase within the actual pension scheme itself. So you’ve got an increasing income, which obviously can be important for an awful lot of people. Typically you’ve got spouse’s benefits already built into that as well, which again can be very important. And of course you’ve also got the lifeboat of the Pension Protection Fund. So also helping to give people a little bit more security when they’re looking at their DB schemes.
PRESENTER: But, Steve, we’ve seen a few high profile DB schemes that perhaps aren’t going to pay out as much as the members hoped. I mean is there a danger that DB looks too good to be true, and actually if you’re in a DB scheme you should be worried even if it looks quite robust at the moment?
STEVE WEBB: I think it’s exceptional that your former employer or indeed your current employer will ultimately be insolvent at a point where the scheme doesn’t have enough money to pay the necessary benefits. For most people most of the time this won’t happen. When it does the PPF provides a pretty good floor level of benefits, particularly if you’re over scheme pension age. The PPF pointed out to me the other day that in terms of people who want to take a tax free lump sum for example, the way they work it out is more generous than many occupational schemes do. So normally you give up a quarter of your pension when you take a lump sum, but many company pensions don’t give you much lump sum for that quarter. PPF will give you more.
So actually the PPF benefits for most people most of the time are a pretty good floor. And of course every year some firms, some sponsor employers will become insolvent, but you can’t always guess who that’s going to be, and that’s a pretty specialist job really, so most people should not worry that that’s a risk in most cases.
PRESENTER: And are there any tax benefits or disadvantages, Justin, of being in the DB or the DC route?
JUSTIN CORLISS: Well it really depends on your other income. If you’re in a DB scheme and you have significant levels of other income, then yes maybe that can be quite disadvantageous to you because you can’t opt not to receive it. Whereas within pension freedoms you’re in a position to be able to only draw out as much money as you require, and thus be able to manipulate your level of tax that you pay.
PRESENTER: And does the DC route give you greater flexibility on things like inheritance tax planning?
JUSTIN CORLISS: Most certainly. In fact within a DB scheme there’s not really a lot of inheritance tax. It will generally go to dependent children up to the age of 23, or to a spouse for the remainder of their life. But once either of those cease to receive then the flow of income stops; whereas obviously within the DC you’ve got a pot of money upon your death depending on your age it will either be passed tax free to your beneficiaries, or taxed at their marginal rate, who incidentally don’t even have to take that money if it doesn’t suit them and they could leave it to pass on to their beneficiaries upon their death if they chose.
PRESENTER: Well, this all sounds very reasonable, so Steve why is it becoming a bit of a political and regulatory hot potato at the moment?
STEVE WEBB: Well we’re coming towards the end of PPI, people being missold a product and years later coming back and saying I’ve been ripped off. And the nightmare scenario would be a few years down the track people say to schemes and particularly to financial advisers hang on a minute, I took my money across, I’ve invested it, the stock market’s gone down, it’s worked out worse for me than if I’d stayed put, I want someone to blame. And quite properly regulators and advisers and others are trying to make sure as far as possible that we anticipate, instead of being caught retrospectively, we anticipate what people are going to say if things don’t work out. And we (a) make sure people know the risks they are taking, we make sure that all the processes are tightened up, and a few advisory firms have had to just pull back for a little while to tighten up their processes. And personally I’d far rather that happen now than a few years down the track.
PRESENTER: And Vince, is there a bit of a feel that we’ve been here before with things like pensions, personal pensions back in the 1980s, that was all about freedom?
VINCE SMITH-HUGHES: Well it was, and in fairness we’ve been here before with DB transfers haven’t we? So we saw an awful lot of transfers and an awful lot of compensation going out because of transfers being done wrong 25 perhaps years ago. I think it is different now though. I think that advisers are more aware of all of the issues. So hopefully there’s not a repeat of that particular situation. There is a lot of things that advisers do need to be doing to ensure that those cases are suitable.
PRESENTER: So, in terms of the FCA’s stance at the moment, if you’re an adviser and you want to get involved in pension transfers, what does the FCA say today?
VINCE SMITH-HUGHES: Well I mean first of all obviously make sure that you’ve got the necessary permissions. Obviously you’ll need to have the right exams to be able to get those permissions. I think there’s an awful lot of guidance in terms of what’s required. So for example we had a very helpful note from the FCA and their expectations in defined benefit transfers back in January. I think there was a lot of information in there which can really help people. And particularly around things like if you’re maybe receiving introductions from other advisers and what needs to be done, you know, it’s important that the introducing adviser and the adviser who’s giving the advice are actually making sure it’s consistent in terms of the advice. You know, what sort of expectations the fund may produce, what expected growth rates might be coming out into the actual scheme so they can allow for that in the advice process.
I think the other thing which is actually a really good guide, which I would strongly recommend that advisers have a look at, is the PFS Good Practice Guide, which can really help advisers to identify the key things they should be doing.
PRESENTER: Now, I think we’ve got links to those below the player, so hopefully people will be able to pick those up and look at them. But I suppose the other thing, Justin, just to have a little look at is, are there any particular concerns the FCA clearly have got with the advice market and where it might go wrong?
JUSTIN CORLISS: Yes, they do have some concerns that I think they have relatively clearly set out. Those people who don’t have sufficient income to be able to see them through retirement, and to be able to demonstrate that that is there and guaranteed, if you don’t have that then the FCA seem to think that that will be quite a significant problem. In addition to that if somebody simply doesn’t have any demonstrable need to move out of that DB scheme into a defined contribution scheme, then they seem to allude to well why are you doing it? You need to have a need and an objective. And they also highlight, and I think it was in the consultation paper that was in June of this year, that the objective is important, and that’s why the client has arrived at the office. But if it doesn’t fit their need, then it’s not likely to be considered suitable by the FCA.
PRESENTER: And in terms of being an adviser, Vince, what are some of the barriers you’d have to overcome to take part in the market?
VINCE SMITH-HUGHES: Well I mean clearly as I mentioned earlier you’ve got the right permissions, but I think importantly you’ve got to make sure your suitability process is absolutely spot on. So one very small thing for example, as Justin was saying earlier, there’s a big demand from clients because they foresee it as a way of cascading wealth down the generations, and that’s absolutely right and we’re getting exactly the same feedback from advisers. But just taking that point in isolation, has the adviser considered for example life assurance as a means of being able to do that? Could you stay in the defined benefit scheme with that certainty of income, but actually fund life assurance to actually then cascade that wealth down the generations? Now it may not be possible in all cases, of course it isn’t, because people may not be able to get the cover, but it’s something you’ve got to consider.
So I think for advisers who are getting into the market have a look at all the really great stuff on things like the PFS guide, have a look at things from the FCA, you know, the document that came out in January, the recent consultation in terms of the direction of travel, and it can really help you to put together what’s going to be a really sustainable and comprehensive suitability process to make sure you’re giving the right advice.
PRESENTER: Steve, at Royal London you’ve been doing some research with advisers on their views of pension transfers. Can you talk us through what some of your main findings are?
STEVE WEBB: Yes sure. We asked a group of about 800 advisers what the main reasons people wanted to transfer and what the least likely reasons were, and they were actually quite reassuring and mirror some of what we’ve been talking about. So absolutely number one was flexibility. So you might for example have a state pension, you might have a spouse with a state pension, you might have some DB, and then actually some DC, a pot of money you can invest and use flexibly, maybe front load some spending in your retirement if you want to. You can see why that’s an attractive option for people, so flexibility was right up there. Inheritance, we’ve talked about. Although of course you always have to be, these darned politicians, they change the rules, I’m told.
STEVE WEBB: So you can’t be hundred percent certain that those rules won’t change, so you need to tell clients that. And at the other end of the scale reassuringly reasons people weren’t transferring on the whole were just to blow the lot on riotous living, Italian sports cars, whatever, you know, very little evidence of that. Not much PPF issue, worries about the solvency, so actually people on the whole doing it for what seemed to be pretty plausible reasons, which is reassuring really.
PRESENTER: And moving on from there, I want to pick up reasons why people might consider moving out of a DB scheme into a DC. But if they were say in their 40s or 50s. Justin, could I pick up with you, just for that cohort what are some of the specific issues there?
JUSTIN CORLISS: There would be the reason that they perhaps wanted to retire earlier than the DB scheme was allowing; however that was another one of the things that was picked up in various consultation papers, actually TR40 and 12 that was on enhanced transfers for advisers to investigate what the early retirement provisions are, and late for that matter, within the scheme, which seemed to be not being done often enough. People may simply want to manage the money in line with their own attitude to risk, which obviously within a DB scheme it is a pooled investment, so the trustees will be. If somebody was not married and their scheme didn’t allow provision for their partner - who they’re not married to - to actually receive benefits upon their death, although that is less and less the case, and a lot of particularly public sector schemes it is possible to nominate that partner, but that can be another reason as well.
If you simply want to, as Steve alluded to, frontload your spending, spend more when you’re younger and you feel that you’d like to do more, in the understanding, and that is the important part, in the understanding that there will be less available in later life, then that can be a valid reason as well. And I suppose the other big one is ill health. If you’re in poor health and you don’t feel that you’re going to get value from the DB income - which will take a lot longer obviously because it comes in at a set rate - that could be a reason to move across as well.
PRESENTER: And how much is the risk and reward of this, or the risk-reward spectrum shifted, Vince, because essentially if you take the money earlier you’ve got longer for it to grow by the time you’re 65 than say if you did a transfer out at 60?
VINCE SMITH-HUGHES: Yes, absolutely, so you’ve got longer for it to grow, that’s certainly true. You of course also need to be mindful that the transfer value is likely to change as you approach retirement. That’s going to change with all sorts of things, interest rates will have an effect, etc. etc. So you’re transferring at a time now where I guess it’s historically high, or transfer values are historically high, that transfer value could reduce. That’s not impossible, so you’ve got to think about that as a potential risk as well. Clearly there is a risk if you’re transferring out in your 40s, because you’ve got that much longer to go through retirement. But equally there’s an argument to say that that should mean that on average the performance you achieve is going to be better over a 15 or 20-year period, i.e. you’re taking less chance than if you actually went into a shorter term.
I guess the only thing you also need to think about though of course is we tend to do returns on a consistent 4 or 5% return until retirement, and returns aren’t like that are they? So less of an impact before you start taking benefits, but say you transfer out in your 40s then start taking benefits in your mid-50s, which a lot of people do, you’ve also got to be aware of the sequencing of returns risk. That can really damage someone’s income if you see a fall in value as early on in retirement.
PRESENTER: Can you just talk us through, because I know sequencing risk is incredibly important, can you just give us an example of what happens if your path in DC starts off well versus starts of?
VINCE SMITH-HUGHES: Sure. So I mean if you start off well and perhaps you get two or three years of really good returns, that can really boost your fund value and actually make the whole drawdown strategy become a success throughout the period of retirement. But, conversely, let’s say you start off and hit some very negative returns in the early years, it actually is pretty hard to recover from. You know, if you’re hitting sort of like a 10 or a 15% drop in income and you’re actually taking, sorry, in your fund value, and you’re taking income from that, what you’ve effectively done is crystallise your loss when you’ve taken that income. Making it doubly hard to actually recover the fund and have a successful strategy. There are a number of things that people can do about that, but people should be mindful that is a problem.
PRESENTER: Well, Steve, to what extent is, you know, in 10 years’ time when we all back on this, is this just going to come down to what markets did? You can have had all of this discussion with clients, you can have had as much paperwork and documentation as you like, but fundamentally if markets went down a lot and with the money that’s left you didn’t get a particularly impressive yield, people are going to come knocking on your door.
STEVE WEBB: There is an element of that. But actually one of the paradoxes of this for me is that looking back will it ever be possible to say you did the wrong thing? Because actually if you took some cash, you spent it, you know, you cleared your mortgage, you had the extension on the house, you paid for your daughter’s wedding, whatever it was, you have memories for the rest of your retirement, and some point his actuary comes along and says yes but the yield on this investment was lower than you, you know. Is it still necessarily the wrong thing? So yes of course, there’ll be a set of people who took the money, invested, and it went down at some point over the coming period and looked back longingly on their DB pension, and that’s bound to happen. But actually an awful lot of people I think, it’s one of the few policies that I was involved in in government where to do this day people walk up to me in the street and shake me by the hand and thank me. And that’s almost unique.
PRESENTER: But I suppose there’s two things there isn’t there? As an individual who feels with the power of retrospect they made a suboptimal decision, they could be a bit better off, and then you’ve got a point where it’s all over the papers and the regulator says right we’re going to roll our sleeves up and solve this problem once and for all, here are some more rules. And I guess advisers are probably more worried by that latter scenario than a philosophical client.
STEVE WEBB: It’s again those darned politicians isn’t it? There will come a day when someone walks into an MP’s office and says look I lost half my money, fix it! And it’s actually a brave politician who says look them were the rules, there was proper process, you made an informed choice, go away. As against oh we’re coming up to the election, there’s something in this for me, I’ll launch an enquiry. And, you know, firms, advisers do live always under the spectre of retrospective legislation, and that’s why making stuff as tight as possible now, really cleaning up everyone’s act now is the best antidote to that.
PRESENTER: Well just very quickly, because you obviously were in government, you’ve been a politician for a number of years before taking on your current role, how big is the temptation to solve problems?
STEVE WEBB: Massive, absolutely massive. I mean actually standing up to people and saying you knew what you were doing, you have to be an adult, take responsibility, is a very challenging message. And because of that actually this industry as a whole has a pretty damaged reputation. It’s all bashing people who the public and certainly the media are willing to believe we’re ripping people off in the first place is extremely tempting.
JUSTIN CORLISS: May I just wade in on that very briefly? The term capacity for loss has come to the fore a lot since pension freedoms have come about. Now, advisers who are going through the process of DB transfers correctly and making sure that clients have an adequate capacity for loss, and still should be able to sustain their retirement income through, should create a situation where that shouldn’t be as prevalent. It’s not really just a case that it’s whatever markets did. No that should have been factored in to the decision right at outset. And hopefully with all the guidance that we’re getting, and more to come fingers crossed, that’s what we’re going to see in the future.
PRESENTER: And I suppose this ties in, I mean certainly here on Akademia we’ve had a number of annuity providers on, and they’ve made that point that annuity is not dead. If you can cover off your basic needs with an annuity, and I suppose essentially or with a DB scheme, if you’re then lucky enough to have more money you can take more risk with that, which might enhance your lifestyle. But if it went wrong, do you know what, you’ve still got the basics covered, I suppose that ties in there.
VINCE SMITH-HUGHES: Yes, I think that is fair, Mark. And us and one or two other providers now also offer guarantees in drawdown as well, and that’s another thing that people can do if they want some security of income.
PRESENTER: Well, just very quick, one final bit on this investment piece, if you decide to take the money out of DB, Vince, do you need to invest it in DC straightaway, or is it OK as an adviser to say well let’s hang on to this cash because I’m actually a bit worried markets are topping, that’s why we’ve been given this big sum today, might look smarter to do something with it in 12 or 24 months?
VINCE SMITH-HUGHES: Yes, I mean it might well do. The difficult thing is timing the markets is notoriously difficult/impossible. So if you’re saying well we’ll come out and we’ll sit in cash for a little while until we see the markets drop, what if you’re there in five years’ time and the market hasn’t dropped? I think that’s quite tough. What I do think is that advisers can really help going forward by managing the actual client’s income. If they are in this process of taking income, maybe they’ve got a range of assets and they’re taking income from funds or assets which have performed particularly well to avoid the sequencing of return risk problem that I spoke about earlier, but certainly managing the money going forward can really help it. I’m not sure about sitting in cash for a long period of time though, I think that could cause other problems.
PRESENTER: And Justin, quickly, we’ve talked about some of the pros and cons, but if you’re an adviser and you’ve got a client who says I just want to do this, really insistent, they just want to do it, and you say I really don’t think that’s a good idea, and you explain why, and they still want to do it, and it keeps going backwards and forwards. What’s the best strategy?
JUSTIN CORLISS: Well the FCA have never given a definitive process that made an insistent client, in fact they only really acknowledged the term insistent client in the most recent consultation paper that came out in June. They do give some guidance. They gave some in what was called FCA Fact Sheet 35 where they gave a three-step process. In the most recent consultation paper in June they gave it a five-step process, which was essentially give the advice as you normally would, which possibly you don’t know they’re insistent at that point, so you will. If they then want to go insistent against your advice, just sit down and explain to them all the reasons why it was, perhaps work through your report to say these are all the reasons I didn’t feel it fit your needs. If they still want to go ahead explain that it was against your recommendation, perhaps even do a separate suitability letter if they then want to go ahead that is separate to the original one you did. And to preferably get their own words, in their own words as to why it was that they wanted to go ahead, please as advisers don’t write that out for them and have them sign it, get it from them directly.
PRESENTER: And you’re confident if that happened you’d be, so your position would be copper bottomed there.
JUSTIN CORLISS: I’m confident that that’s what the FCA have said thus far.
STEVE WEBB: And I mean it’s fair to say most advisers just won’t transact. So in the survey we did the majority of advisers would simply blanket refuse to transact.
STEVE WEBB: Yes, which is difficult if it’s a client you’ve got an ongoing relationship with. But I guess if it’s someone who’s walked in off the streets, handed over a transfer value, you really think they shouldn’t, some advisers will just say look I’m sorry, I just don’t think this is the right thing, I’m not going to do it.
PRESENTER: I suppose another issue is so called contingent charging. Good idea or bad idea, Steve?
STEVE WEBB: I think in all the steps of this process you’ve got to be aware of incentives that don’t align perfectly with the client’s incentive. Now it may be that there are ways of overcoming the biases involved in different charging structures, but it always makes you nervous if an adviser might be thought to have an incentive to choose something before they’ve met you, just because of the way the charging is structured. Now perhaps people and processes are overcoming that but ideally you have something that’s completely neutral with regard to the decision because we’re all human.
VINCE SMITH-HUGHES: I mean I wouldn’t disagree with what Steve said there. I mean there are processes I think as you say Steve for actually dealing with it. I mean for example larger firms could have people who are making the decision as to whether they will transfer or not, aside from the adviser. So in other words the adviser’s not taken part in that initial decision whether it’s going to be a transfer. In which case I think you deal with that bias to a large extent. Having said that of course that needs a certain size of firm, and a lot of smaller advisers aren’t going to be able to have that resource.
PRESENTER: But also isn’t it, from the outside isn’t there often a little bit of scepticism about how thick those Chinese walls are just generally? I mean how do you prove one genuinely exists?
VINCE SMITH-HUGHES: Possibly, and I do think you need to have a very tight process to make sure that’s managed properly.
PRESENTER: Well I think we’ve got about five minutes left on this. We’ve got through a lot of information, but I suppose it’s thinking of ways forward. What next? I mean, Vince, let’s come to you first, I mean DB to DC, it’s quite binary at the moment, do you think there should be a middle way?
VINCE SMITH-HUGHES: Well I mean of course people have talked about partial transfers, and personally I’d be a fan of more schemes offering that. And I think it’s also just important to clarify when we talk about partial transfers what we’re not talking about is a scheme then having a number of transfers out over a period of years; what we’re talking about is allowing perhaps one partial transfer to split the actual benefit value in two, where one bit goes to DC and the other stays in the DB scheme. Personally, I’d be a big fan of something like that happening, I think it does give people, in some ways it gives them the best of both worlds. So I’d be a fan of seeing that becoming more available.
PRESENTER: Justin, from your point of view, what would you take this on?
JUSTIN CORLISS: I think we’re already starting to see moves from the regulators towards trying to give greater guidance to advisers as to what’s acceptable and what’s not. Things like the proposed new transfer value comparator to replace what was TVA that focused heavily on things like critical yield. The assumption was that many people simply didn’t understand what was required in a critical yield, that it had to be achieved year after year, and if we had poor returns in the first year sequencing risk would make that even more difficult. So the transfer value comparator is basically capitalising those sums, and saying you’re being offered this amount for your DB transfer at the moment, however to buy the same benefits that would have provided you, you would have needed X, which might be greater or lesser. So just trying to improve people’s understanding of how long money needs to last, the impact of inflation, the danger of markets dropping, and people being more aware. Cashflow modelling, I think, is absolutely key within that so that people fully understand what it is that they’re undertaking.
PRESENTER: Well it’s quite a good point you’ve raised there. I mean if someone did offer me a big sum of money to get out of a DB scheme, should my first thought be actuary the other side of this probably knows a lot more about maths and the way the world works and life expectancy than I do. My first, at first it could be a little bit sceptical.
JUSTIN CORLISS: They don’t know about your lifestyle and your particular circumstances though. They don’t know if you’re in ill health, if you have lots of other wealth, if you have a strong desire to leave money on to other people or any of those things. But I will say is that people do have a tendency, so we believe from studies and so on, to put too much emphasis on a large sum of money now, rather than regular amounts coming, even if you capitalise those regular amounts and they amount to more than that large of sum of money today.
PRESENTER: So there’s a value in deferred gratification.
JUSTIN CORLISS: Present value bias is what it’s referred to.
PRESENTER: OK. And just onto this idea of a partial transfer from DB to DC, do you get a sense there’s much appetite to support that amongst government or regulators?
STEVE WEBB: There’s appetite amongst advisers, certainly the advisers we surveyed were very keen. Regulators, it’s a second order issue for them, I think. But I mean I think if schemes actually want to focus on the interest of the individual member, giving them a new choice is generally a good thing. I think the untapped potential in this whole market is a sort of sleeping giant of five million deferred members. So you’ve got five million people, memberships technically, people under pension age, deferred members of schemes, who in most cases hear nothing from their scheme.
We’ve just done a paper this summer, with Lane Clark & Peacock who surveyed a 100 DB schemes: the vast majority do not communicate with their deferred members at all. A pension of £100 a week could have a transfer value of approaching £200,000, and they don’t know. Probably under European law and other law deferred members will start to get annual statements. If those statements have transfer values on them, there’s a whole bunch of people sitting on some pretty hefty amounts that they just don’t know about at the moment. So I think this market probably has a long way to run.
PRESENTER: And if you’re an adviser and you’ve got a client who unbeknown to them has got a bit of deferred DB pension, have you got any responsibilities to find out about it, to chase up on their behalf?
STEVE WEBB: I mean ideally you would think that the trustees of a scheme who are there to act on behalf of the scheme members would be communicating, but they clearly aren’t at the moment. So absolutely it seems to me advisers encouraging scheme members to find out what they’ve got, to find out what their options are, and certainly an adviser can help a client, because frankly the client won’t necessarily know what the question to ask is. So whether it’s getting CETV, finding out about early retirement options, enhanced pension earlier in retirement and less later. There’s a lot of flexibility within DB pensions as well as taking some or all of the money out, really the adviser needs to make sure the client knows all of their options and can navigate through that maze.
PRESENTER: Final question time now. Justin Corliss, if you’re an adviser thinking about going into this market, or you’re in it already, what would you advice be? What support and help is there out there?
JUSTIN CORLISS: If I was thinking about getting into it, obviously aside from qualifications and so on which are essential, I would be perhaps looking for an experienced adviser to mentor through the first couple of cases. And that was another thing that they alluded to in the recent consultation paper. If you were involved with it at the moment I would be ensuring that, made sure that we looked at the income and expenditure for the client as it was at the moment, so we get an idea of what it’s going to be in the future, and then ensure that we have some means of being able to satisfy that essential income requirement, and if there isn’t then perhaps the DB option is the one to stay with.
VINCE SMITH-HUGHES: I think a few things for me. Justin’s already alluded to it, but make sure you’re thinking about the soft facts as well as the hard facts. I think that’s a really important point. But also make use of all of the information that’s out there. There’s plenty of information out there now. So for example we’ve got our transfer toolkit, which has not only got information, case studies, articles from people in Pru, also people like Rory Percival, to go and have a look at that. And make use of that PFS guide I referenced earlier, I think that’s a really valuable guide actually. But also have a look at the FCA information as well, and particularly things like the document that came out in January, particularly if you’re receiving enquiries from other advisers, or you’re giving enquiries to a pension transfer specialist, I think there’s some really valuable information in there.
PRESENTER: Steve Webb?
STEVE WEBB: Yes, I think in addition to what my colleagues have said keeping up to date is crucial. It barely seems there’s another week without another statement from the regulator, a consultation, a government review, and this is something where if you’re not up to speed and almost ahead of the game. We already know roughly the way the FCA is going to rewrite the rules for next year, if you do stuff this year as if well it hasn’t changed yet, it’s likely the FCA are going to come back and say well come on, you knew the issues we were raising, you knew why we were thinking of changing, you already need to be thinking about where there are lessons to learn now, actually to be ahead of the game in many ways rather than always catching up.
PRESENTER: Thank you all very much indeed. We have to leave it there. My thanks to Justin Corliss, Vince Smith-Hughes and Sir Steve Webb. From all of us here thank you for watching, goodbye for now.
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