Posted: 11th August 2020
How successful has the legislative agenda on DB pension transfers been so far?
I suppose it depends on who you talk to.
While the Financial Conduct Authority (FCA) has been trying to help providers improve their processes and outcomes in a measured manner, some would argue that the framework has not been overly clear, leaving pension schemes and trustees unsure of how and whether they are meeting expectations. For customers, this ambiguity means that some pension firms and advisers will have been allowed to continue operating, despite not prioritising customer outcomes.
Now the economic crisis created by the COVID-19 pandemic has created new challenges.
Evaluating the recent FCA measures
There is a lot of merit in the measures the FCA has announced. While these changes would ideally have been brought in some time ago, I do think a pause in transfers (excluding those in exceptional circumstances) is wise – especially as, in most cases, there isn’t huge urgency in terms of transferring funds. The worst that can happen, if you delay transfers, is that people stay in the scheme. That's not a terrible outcome. Surely it is far more important to take a bit of extra time to ensure a transfer is the right decision, rather than rushing to move the funds and then discovering the decision was wrong. The transfer is an irreversible decision.
When it comes to the changes around contingent charges, these are probably the easiest for the FCA to remedy in the short term. I never understood the contingent charging model – I see financial advice as a profession, and the value of good, independent financial advice from an expert who can look at all your circumstances can save you far more than you would pay in the actual fees.
Ensuring high-quality financial advice
The quality of financial advice on offer is pretty good in most cases, the problem we've got is some rogues and fraudsters are tarnishing the financial adviser brand. With this in mind, the FCA’s decision to increase qualification requirements and the investment qualifications for advisors is very sensible.
A major underlying issue is that we have been left with a legacy of people expecting financial advice to be free. Nobody would expect an architect to design your house or an extension to your house without you paying them. They're a professional, they know what they're doing, and they can tell you how best to do it.
So abridged advice is an attractive idea: an overview look at your circumstances may provide an explanation why it might not be advisable for you to transfer.
For example, if you’re in good health, have no other secured retirement income apart from the State Pension, no excessive high-cost debts, and no clear rationale for transferring out of the scheme. We have the ideal funding mechanism for that built into pensions now, with the £500 pension tax-free advice allowance. The regulator should encourage DB trustees to use the ‘scheme-pays’ mechanism that we already have, to make sure that members have an initial independent assessment of the benefits and the risks of transferring out.
An uncertain time
The initial phase of this pandemic and the impact that it had on financial markets certainly threw a spanner in the works of many defined benefit pension schemes. Although some of the markets have recovered, there is still an ongoing fear about what's happening, what's coming down the line, as well as the impact the pandemic will have on long-term interest rates. It may be that the trend moves towards negative interest rates, which would be a disaster for DB scheme funding.
Many trustees are urgently seeking advice as to how best to control and manage their pension or covenant risks, especially given the fallout of this crisis. It's mostly through the investment markets, but we've also seen a number of increased inquiries from members who are concerned about the security of their pensions. On the defined contribution pensions side, generally speaking, those who were invested significantly in equities had quite a shock initially, but markets subsequently regained much-lost ground.
Having an open and honest discussion about investment processes and risks is helpful to individuals because, in times of trouble, most people’s initial reaction is to sell. It is therefore critical for advisers to be able to look at the long-term picture and explain the history of previous market crashes. This could stop customers from making kneejerk decisions after sharp market falls, which may just lock in losses, rather than benefit them in the long run. Helping people to understand that investment markets and risks are a fundamental part of long-term investing, rather than something to be automatically frightened about, should be a top priority.
The future of the industry
Of course, nobody can predict with any certainty what will happen down the line, but my best guess is that there will be more central bank action to come to better support markets. We may also see some critical tax changes, which will affect pensions, although such reforms could be positive or negative - it is not clear yet.
Many of the issues that have arisen in the market thus far have been linked to transparency, whether it be the disclosure of fees and charges or the explanations given around the types of investment and the risk levels associated with them. With that in mind, I think it’s fair to say that there will be an increased regulatory focus on customer outcomes and transparency moving forwards.
* Baroness Ros Altmann was UK Pensions Minister from 2015–16 and is an advisor to Hunstwood.