Lack of DB transfer clarity still worrying advisers
As written by Steven Cameron, Aegon Pensions Director
Refreshed guidance needed
Up to now, advisers have had to draw their own conclusions on how to reflect pension freedom in their advice but, Aegon's Steven Cameron hopes that new rules, expected from the FCA in early 2018, will herald a new era of clarity.
The attraction of pension freedom, coupled with rocketing transfer values and growing concern over the adequacy of defined benefit (DB) scheme funding, is fuelling demand for advice from those clients considering transferring out of DB schemes.
According to Aegon's new Adviser Attitudes Report, which tracks attitudes and concerns of the UK financial adviser market, around three quarters (73%) of financial advisers expect demand for DB pension transfers to increase over the next 12 months, with a third (30%) expecting a significant increase.
In fact, more than half (53%) of UK financial advisers identify advice on DB to defined contribution (DC) transfers as one of the most significant growth opportunities for the advisory sector over the next two years. In the last two years, according to data from Mercer, more than 200,000 people have transferred £50bn out of DB schemes and financial advisers are clearly not expecting this to slow down.
While demand grows, however, adviser willingness to offer advice is divided, with concerns about the lack of clarity around what the regulator sees as best practice leading to caution from many. More than a third (37%) of advisers now say the current regulatory guidance around how transfer advice should be given is unclear. Although a similar percentage of advisers (39%) believe the advice rules are clear enough, the research revealed that almost three-quarters (71%) of advisers feel the regulations are leading to too much caution when advising on DB to DC transfers.
In a landscape irrevocably altered by pension freedom, there is a real need for refreshed guidance from the Financial Conduct Authority (FCA) on its expectations for DB transfer advice.
Back in June, the regulator published its ‘Advising on Pension Transfers' consultation, setting out its plan to replace the existing guidance on DB transfers, which currently have a starting assumption that transfers are not in the client's best interests. There will be huge interest in how this translates into new guidance and what ‘good' looks like to the FCA in a pension freedoms world.
We have now also seen the FCA publish finalised guidance on redress calculations where defined benefit transfer advice is deemed unsuitable. This follows a review by PwC of the existing method of working out redress. The hope is that clearer guidance should reduce the likelihood of advice being deemed unsuitable, giving both advisers and their clients confidence going forward.
Under the current pension freedom rules, those with DC pensions can access their pot any time from the age of 55, choosing how and when to take income. In order to access this freedom, those with DB scheme benefits need to transfer their money to a DC scheme but, in doing so, they give up the security of a fixed income for life.
Some DB schemes offer members the option of a ‘partial transfer' of a portion of their benefits, but this is not a statutory requirement and it is only offered by a limited number of schemes. Three quarters (73%) of advisers think, however, that greater availability of partial transfers from DB schemes would be a positive development, offering a route to a combination of security and flexibility..
Every client has their own set of circumstances and transferring from a DB scheme and giving up a secure income for life is certainly not the right option for everyone. With an ever-growing demand from clients looking at this option, it is no surprise advisers are keen to see how the FCA will update its guidance.
Clear, updated guidance would allow advisers to offer their services with confidence without feeling they have to be unnecessarily cautious. Up to now, advisers have had to draw their own conclusions on how to reflect pension freedom in their advice. Let's hope the FCA's new rules, expected in early 2018, will herald a new era of clarity, allowing advisers to meet a customer demand that is only expected to keep rising.
This article was written by Steven Cameron, Pensions Director at Aegon, for Professional Adviser and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.