Defined Benefit Transfer in a rapidly changing world

Recently, it seems that not a week goes by where Defined Benefit (DB) transfers are not dragged into the spotlight.

Even as the challenges of coronavirus on the worldwide financial markets continue to develop, DB Transfers are still very much in focus across the financial services sector.

We’ve all seen the impact that the COVID-19 pandemic has made on global stock markets and volatility continues, one consequence of which is plummeting gilt yields, often to record lows.

In ‘normal’ times, low gilt yields would usher in a trend towards increased Cash Equivalent Transfer Values (CETVs) and despite ‘normal’ times being a far cry from what we are currently experiencing, the trend towards increased CETVs is continuing.

With this in mind, serious consideration should be given to the impact that market volatility and potential employer solvency will have on scheme funding levels, as well as the decisive action trustees may need to take in response to this – such as reductions in these values.

How are Regulators reacting?

On Friday 27th March 2020, The Pensions Regulator released guidance which effectively allowed Scheme Trustees to temporarily put a pause on providing new CETVs to their members for a period of three months. The regulator also gave them the ability to freeze the payments of these transfer values for the same period.

However, despite this measure, it is important to note that the obligations of Scheme Trustees are not being waived, but rather, no regulatory action will be taken against Scheme Trustees for any action taken during this three-month window.

Upon release, it felt that the regulatory guidance had the potential to be a game-changer for DB transfer advice. However, it has proven to be quite the opposite. Early indications are that most Scheme Trustees are not making any changes at all, with many signalling to us that it’s ‘business as usual’, although this may change of course as we go further into this window.

Another significant development in the DB transfer advice market is the recent decision from the Financial Conduct Authority (FCA) to delay the release of their policy statement until Q2 or Q3.

This was originally due for release by the end of March 2020, and a full ban on contingent charging was deemed likely, together with the introduction of abridged advice.

The delay in releasing this statement seems at odds with other simultaneous action being taken by the FCA, including a heavy focus on protecting clients from scams and a fortnightly request for commentary on DB transfer activity from those firms that they deem active in this market.

Clients are always going to be highly vulnerable to scams in the current climate and we feel that the FCA’s reluctance to follow through on their proposals at this time does nothing to protect against this.

COVID-19’s impact on the wider Defined Benefit Transfer Advice Market

At such a time of uncertainty, it’s clear that clients are more in need of advice than ever and they must not see accessing their DB pension as an escape from any wider financial issues.

It is imperative that any advice currently provided to clients fully considers the potential impacts of COVID-19 in both the short and long term. There are additional risks of transferring in the current climate and clients need to be made fully aware of these before making what is an irreversible and life-changing decision.

DB pensions may offer a client the guarantees and security they need at a time when everything else is so uncertain.

What trends are evident on PII?

One other issue heavily impacting the DB transfer advice market is the availability of Professional Indemnity Insurance (PII) to those firms wishing to continue providing this specialist advice.

PII premiums continue to increase several-fold in addition to policy excesses with, many firms finding it too expensive or too risky to continue providing advice in this area.

This is having the effect of reducing the supply of DB transfer advice, at a time when the demand remains for the service.

PII providers appear to be taking a blanket approach and this, in our opinion, is heavily impacting the ability of clients to get trusted, high-quality advice.

The next few months will prove to be key in determining the future direction of the DB transfer advice market and, in the absence of a vaccine, the post-COVID-19 World.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

iPensions Group Limited is authorised and regulated by the Financial Conduct Authority, Licence Number 464521.