Defined benefit (DB) pension transfers have become much more popular over the last few years reflecting the advent of the pension freedoms and the temptingly generous transfer values on offer. But recent headlines remind us that they remain hugely controversial and subject to intense regulatory scrutiny. Is it possible to reduce the risks of your advice being second guessed by the FCA or FOS to acceptable levels? We believe so. Based on recent work we’ve done for firms, here are our top 10 tips for demonstrating that your DB pension transfer advice is suitable.
- Manage client expectations at the outset
Sometimes it’s evident from the files we review that a client sees the adviser’s role as a largely administrative process to tick the regulatory boxes and implement a decision already effectively taken. You need to show you’ve disabused the client of any such assumptions. You’re an adviser, not an order taker, and this is a complex piece of advice. Before you take the case on, ask a few targeted questions to find out why the client wishes to transfer and to establish an outline of their financial circumstances and plans. If the case for transferring looks weak turn it down, or at least warn the client there’s a strong chance you’ll end up recommending against the transfer.
- Contingent charging? Just say no
DB transfer advice involves unique risks and challenges, not least because many clients resent having to receive and pay for it in the first place. So it’s essential that the way you are paid for your work does not put you under unnecessary pressure by creating conflicts of interest. Make it crystal clear to clients that they must pay for your advice, regardless of whether you recommend that they proceed with the transfer. If the client will not accept this, turn them away. No exceptions. It’s fine to charge an implementation fee if you do end up facilitating the transfer, but this should not be a disproportionately large proportion of the total fee. In other words, make sure you charge enough for the advice and recommendation to allow you to walk away with an acceptable profit for your business if no transfer takes place.
- Don’t take on a race against short transfer value deadlines
When a client receives a transfer value (CETV) from their DB scheme, it will usually be guaranteed for three months. If the client comes to you for advice with less than a month of the deadline left, ask them why they left it so late. Perhaps they’ve already received advice elsewhere and didn’t like the answer? In any case, it’s not your fault there’s not much time left to obtain the DB scheme details and do the analysis. So don’t be bounced into racing against the CETV deadline. It’s more important to get the advice right than to hit the deadline. Either turn the case away, or make sure the client understands why the process can’t be rushed, that you’re not promising to hit the deadline and that it’s the client’s risk if their next CETV is lower.
- Challenge the client’s objectives for transferring – do they stand up?
In our experience, failure to do this is probably the most common reason why some advisers come unstuck with DB transfers. Your job is not to take the client’s reasons for transferring at face value, and write a Suitability Report to justify them in as convincing a fashion as you can. Your job is to assess those reasons against the client’s personal and financial circumstances, and their future plans and aspirations, and use your professional judgement to decide whether they make sense. How likely is it that the client will be in a position to take advantage of the ‘flexibility’ afforded by transferring out of the DB scheme? For example, if the client says he intends to leave the funds in his pension to his children after he dies, is this a credible objective supported by evidence that he won’t need those funds to support his retirement income. Is there any reason to believe that this client has lower than average life expectancy?
- Client’s retirement plans don’t rely on the DB pension scheme? Show me the evidence!
Is your recommendation to transfer based on the client having sufficient income and assets to support a comfortable lifestyle in retirement, so the secure income from the DB scheme is surplus to requirements? Make sure you have robust evidence and analysis to back up this assertion. Would it be clear to an independent third party, such as the FCA or FOS, how much retirement income can realistically be generated from these alternative sources, and that the client has bought into your analysis and made an informed decision?
- Make sure the client understands the impact of a DB pension transfer on the lifetime allowance
It’s good practice for the suitability report to contain a comparison of the pros and cons of transferring out of the DB scheme, and this often works well in table form. But have you included all the factors that are relevant? One element we sometimes find missing from the comparison is the adverse impact on the client’s lifetime allowance headroom. The relatively generous treatment of DB schemes under the lifetime allowance rules often means that transferring out takes the client (further) over the threshold, so they incur a (higher) lifetime allowance charge. Make sure the suitability report quantifies the likely impact so you can show the client has made a fully informed decision.
- Consider how to make your suitability report more helpful and engaging
Suitability reports for DB transfers tend to be (unavoidably) longer than for most other types of advice. But there are things you can do to help clients see the wood for the trees that have been felled to produce your report. Use an executive summary at the start of the report which concisely explains what you are recommending and why. In most cases, you should be able to fit this into about half a page or less. If done well, it will also go a long way towards giving an independent observer confidence that your advice is suitable. We often find that suitability reports for DB transfers are longer than they need to be because they contain standard text that is irrelevant to that particular client’s situation, they repeat the same information several times, and they contain technical reference information that doesn’t need to be in the report at all. Be ruthless in editing this stuff out.
- Check that your insistent client process isn’t actually a client-driven recommendation
‘I wouldn’t normally recommend a DB transfer for a client in your situation but you told me that your over-riding objective is to take the generous transfer value on offer while it lasts. So I’m recommending that you transfer into the Aardvark SIPP with the funds being managed by Acme Investment Managers. I explained all the risks and disadvantages of transferring, which include A though to Z’. In this scenario, you are making a recommendation to transfer for a reason that has effectively been dictated to you by the client, and you are still on the hook if it’s not suitable. If you decide to facilitate DB transfers for insistent clients, make sure your suitability report clearly recommends against the transfer and explains why – and that it stops there. After receiving your recommendation not to transfer, a client may tell you they wish to go ahead, and ask you to facilitate the transfer. Tell them you’ll only do so if they write a letter that acknowledges they are acting against your advice, and explains why they wish to transfer regardless.
- Consider whether your PTS is acting as a check on suitability or as a rubber stamp
We’re sometimes told that the DB transfer advice has been signed off by the firm’s Pension Transfer Specialist (PTS), but there’s no evidence on file to show that any meaningful review or challenge has taken place – it just looks like a rubber stamp. We recommend that the PTS completes a dedicated DB transfer checklist for each case he or she is asked to sign-off on behalf of another adviser. This checklist should be focused on assessing client outcomes – does the evidence on file demonstrate that the advice is suitable, and does the suitability report evidence that the client has been able to make a fully informed decision?
- Who in your firm has the independence, expertise and clout to assess and challenge DB transfer advice?
Perhaps the answer to this question is ‘no one’, and you’re relying on a single PTS to write most or all of the DB transfer business. In this situation, use an independent external expert to review a sample of your DB transfer client files to test whether they evidence suitability. Ideally, you should get new cases independently reviewed before the recommendation goes to the client, at least until you’re comfortable that your client files can stand up to external scrutiny.
How can Bovill help with your DB pension transfer advice?
If you’re looking for an independent assessment of whether your DB pension transfer advice evidences suitability and fully informed client decisions, we can help. For example, we can review a sample of client files, review your suitability reports, validate your own internal quality checks, or deliver training to your advisers on how to evidence suitability.
Also featured in the Financial Times Adviser – read here