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Defined Benefit Pensions

by Damian Davies on 30·11·2017

Giving Non-Transfer Advice

Think about the last time you had a case where the client has a DB pension. I'm not talking about those situations where a client comes to you for advice on transferring their DB scheme, I just mean the cases where they have a DB scheme at all.

According to the House of Commons Work and Pensions Committee Defined benefit pension schemes Sixth Report of Session 2016-17, there are 5,794 schemes with 6,600,000 members that are either deferred or active (in other words, not receiving a pension). That's about 20% of people of 'working age', so the chances of you stumbling across a case where a client is a member of a DB scheme is pretty high.

These cases are really dangerous for you, even if you do not recommend a transfer.

DB transfers are still a hot topic for everyone. Advisers are interested, the regulator is interested and unusually for anything to do with finances (that isn't a PPI claim, anyway) the public are interested too. As such, everyone's favourite adviser 'my mate down the pub' is really busy.

'My mate down the pub' is a lucky guy. He can say whatever he wants about investments and pensions and has absolutely no repercussions. The difference between them and an adviser is, of course, the adviser has chosen to get regulated to give advice, gets paid to give advice and is consequently responsible for the implications of the advice.

The issue in a lot of the debate around DB transfer is the assumption a transfer is going to happen and the implications an adviser faces if a complaint arises. Just look at FG17/9, which outlines DB redress. If an adviser recommends a client transfers out of a DB scheme and that advice is found to be unsuitable, the redress could be over 28 times the lost pension!

In addition, Rory Percival recently suggested that the regulators increasing interest in behavioural economics means that they may be looking at advisers working on a contingent model who could be playing up factors which work in favour of a transfer and play down ones which work against a transfer because of their contingent charging biases to transfer.

One thing that is often overlooked, however, is the risk of recommending a client stays in a scheme and that scheme then blows up - even if the client isn't looking for transfer advice. Think about it for a second.  Telling a client to take no action and remain in a DB scheme can be as dangerous as recommending a transfer.

According to the House of Commons Work and Pensions Committee Defined benefit pension schemes Sixth Report of Session 2016-17, of the 5,794 schemes 26% there are an astonishing 74% in deficit.

At the PLSA conference, the Chief Executive of The Pensions Regulator said that whilst most schemes are fine (define fine when reading the number of schemes in default according to Work and Pensions Committee report above) and she did not believe DB transfers were causing funding issues for schemes she was concerned that increased DB transfers could put pressure on funding for those remaining in the schemes.

'There are liquidity challenges potentially for some schemes,' she said. 'We are monitoring that closely and it isn't a problem as yet. But one thing I have learned from this job is the situation can change very quickly and we will probably be having an entirely different conversation in six months' time.'

At the same conference, the PLSA issued the 'DB TASKFORCE: OPPORTUNITIES FOR CHANGE' document in September which said that "Millions of people's retirement incomes are now at risk with approximately three million people in DB schemes having only a 50% chance of seeing their benefits paid in full."

Only this morning New Model Adviser reported that 'Sara Protheroe, chief customer officer at the Pension Protection Fund (PPF), has warned IFAs they should not be using defined benefit (DB) deficits to lead members into DB transfers.'

So, if you recommend a client REMAINS in a DB scheme, you need to be sure the advice is sound. Remember, Recital 87 says that under Article 25(2) of Directive 2014/65/EU (MiFID II to you and I), investment firms should undertake a suitability assessment not only in relation to recommendations to buy a financial instrument are made but for all decisions whether to trade including whether or not to buy, hold or sell an investment.

There is a way to protect yourself and it is good, old fashioned due diligence.

If you recommend a client makes a new investment into a SIPP or a platform or anything else, you will have done your due diligence on that product before including it in your advice. You just need to repeat that process for a DB scheme if you recommend a client remains in the scheme.

I wrote a short article back in 2013 about the difference between research and due diligence and really this stands true on deciding whether a client should remain in a scheme:

  • Research - does the functionality of the arrangement help them with their financial objectives?
  • Due Diligence - how is the company run and is it strong enough for you to entrust the reputation of your business with your clients in telling them to continue with it?

Also, how does the client's DB scheme match your Centralised Retirement Proposition?

Until the government or the regulator force companies with schemes in deficit to forego issuing dividends until the deficit is paid up, the buck stops with you as an adviser.

From what I have heard, if we think DB transfer activity has been high recently, you won't believe what the next 5 years will be like. The risks to recommend transfers are therefore likely to reduce and to recommend remaining likely to increase.