Pensions Regulator must tackle unfair incentives with new rules

I have acted as an independent project manager on a number of these exercises, either on behalf of IFAs or on behalf of employers.

A recurring theme, and the biggest problem that I have encountered, is the failure of the initial scheme advisers or administrators to communicate to employers the realistic likelihood of the number of members that will take up the offer to transfer.

If the project is dealt with in tranches, as they often are because of the number of members involved, the employer often displays significant disappointment when faced with lower than expected transfers at the end of the first ‘batch’.

In some instances, I have experienced the scheme advisers then attempt to influence the financial advisers responsible for giving scheme members individual advice, to ‘encourage’ more people to transfer.

The IFA, of course, is then usually unwilling to lower the benchmark and this often introduces friction between the parties concerned.

Setting up a transfer incentive program is not cheap. The irony is that at the end of a project some employers suffer a ‘loss of expectation’ in the same way that I am certain that many of the scheme members will when they reach retirement, having transferred pension benefits many years previous!

Mike Jones

Director

MyCompanyPension.co.uk

1. DB benefits cost money

2. Overall, less money can only mean less benefit

3. Transfer exercises are designed to save money

4. Members as a whole MUST lose out if less money is paid and transformed into benefits.

5. Trustees need to put their foot down and do their job of protecting their members' interests.

I've been involved in a few cash incentive cases - but not in cases where we've had any involvement with the employer concerned. By the time a client comes to us with an offer they've received, the money has already worked its magic. People know deep down they'll be worse off in the long run, but times are hard. It is no wonder there seems to be a rash of them at the minute, employers are taking advantage of tight times in family budgets.

The TPR consultation paper does a good job of encouraging Trustees to have some teeth but the Trustees are treading a tightrope of employer goodwill. They cannot afford for that relationship to break down. The strongest wording I've seen was a "this offer is made without Trustee support" tucked away in the middle of a paragraph.

The thing that really needs to come out of this is much tighter regulation of the communication. The one that horrified me the most was where the offer letter included a critical yield and put a very positive gloss on the possibility of meeting it. Quite apart from anything, the yield they produced I could not square with back-testing it at all. I queried the figures with the administrator and received the written equivalent of a slap back.

It is no wonder then that some of the more sensible pension offices are scrutinising these cases most closely before they accept them - and in one well publicised case won't accept the transfers at all.

So AWD says 7% is the maximum.

Where does the client fit into this one? The client may be in their early 20/30's and excess of 7% may be achievable.

Its knowing the client that drives the advice not the 7% cap.

Please do not take this that any amount will do but the advice after a full review and the client requirements with full explanations is the driver.

I have been involved with this on several occasions only to find that the deadline is much too short. Usually the info is supplied within the last few days before the offer closes and can distort the client’s wants/needs. This is the issue that needs to be tackled urgently.

One national company had our friends from south London as the adviser and never spoke to anyone. The driver was to transfer. When all the facts were put together the client wished to transfer, only then to be written to and informed that this was bad advice!

Hypocrisy to say the least.

I agree with Michael Brown. If you tell a member that you won't deal with him/her because the critical yield is above 7%, that is advice by default! The job of the IFA is to advise whether to transfer - not just advise members who may benefit from transferring.

I also agree with the other comments about other factors - taking 7% in isolation is far too simplistic (death benefits, PPF, other assets, investment experience, tax-free cash etc etc).

Fact is of course, that AWD probably can't offer the kind of personalised service Michael and Phil are talking about. Neither can the national specialist in hands off phone based box ticking advice. In that event, a rigid ceiling is undoubtedly the safest option.

I, too, agree with Michael Brown (and Phil Gammond). The critical yield is very important, don't get me wrong, as it provides a base from which to work, but if the member (or hopefully deferred member) is 99% certain to emigrate to Australia or feels that he may be at death's door and the ETV is greater than the scheme death benefits (and he's still working - with a new employer - so cannot realistically claim serious ill health retirement from his deferred benefits), then Yes, the deferred member (for it is his money, after all) may elect to transfer, knowing that if he doesn't emigrate or die soon, as appropriate, then he could well have lost out.

Equally, if the deferred member has a £30K pa defined benefit anyway from elsewhere and an ETV 'pot' of just £10K, for instance, then a critical yield of north of 10% shouldn't be a worry if the deferred member is prepared to "go aggressive", knowing that he may lose the whole bundle (but still has his £30K pa, or say £600K in his other defined benefit scheme); it's all a case of what is best for the deferred member, surely. What is the £10K pot to provide? Perhaps £500 pa (£25 per month after tax?) from the DB scheme if left there, if he's lucky, but truly unlimited potential in a SIPP! Which would YOU choose in this situation?

Obviously as the IFA, we need to be very aware of the deferred member's full financial situation (especially as it relates to pensions), but I strongly feel that it is our job (our mission, even) to inform the client / deferred member of what options / alternatives are available to him - as how else can he make a choice / decision?

Naturally, some clients will 'jump' at any chance to exit their (ex-) scheme and we must be fully prepared and strong enough to say No, when it really isn't in their best interests - and also be prepared to explain why.

Of course, a major bugbear here is the Business Prevention Unit (er .... I mean Compliance Department, but you knew that, didn't you!), who may stick to a rigid 7% maximum critical yield (for instance) in all circumstances (despite the fact that they haven't spoken to the deferred member and haven't heard the anguish or enthusiasm or whatever the appropriate mood is for the individual situation), and then demand that the IFA, in the situations described above (all real life examples, by the way, just in case you hadn’t guessed), must issue a NO to transfer report, but then say that the client could become an Insistent client if they really want to, ie they could transfer against our advice. What absolute tosh! (Not that I'm bitter at all, no way)

If we as IFAs aren't permitted to advise as we see fit (but with the client’s best interests always at heart), then what is the point .....?