Pension Transfers

Why Firms Need to Take Care When Advising on Pension Transfers

By The Enforcd TeamThe Enforcd Team

SIPPA cryptic Requirement on the Permission section of the FCA register record for Intelligent Pensions Ltd regarding pension transfers states:

“immediately cease to provide advice in relation to the transfer, or conversion, of safeguarded benefits under a pension scheme to flexible benefits”.

For deVere and Partners (UK) Limited, we see a similar entry:

“Immediately cease to provide third party companies with TVAS/DBAR reports or other similar report of information designed to assist third parties companies in transferring customers DB pensions to an alternative arrangement.”

The FCA places specific requirements such as this when it is concerned by the activities of a firm. In this case, both firms were involved in moving pension scheme members from direct benefit to direct contribution schemes, enabling the release of 25% tax free lump sums at the age of 55. This involved the scheme member losing any benefits associated with the final salary (direct benefit) pension.

This is the tip of the iceberg in what has been a slow-moving car crash.

The Financial Services Compensation Scheme is already groaning under the weight of claims for poor advice against insolvent independent advisors who advised their clients to invest via self-invested pension plans with high fees and high transfer commissions, in UCIS (unregulated collective investment schemes). These UCIS invested in non-UK residential developments, UK student accommodation and commercial builds. Alternatively, they invested in the life insurance policies of US citizens with terminal illnesses. Such “death bonds” would purchase policies from cancer/ AIDS sufferers and maintain the policy premiums until the death of the policy holder (at which point they hoped to take a profit between purchase price and premiums, and pay-out). Yet other UCIS pooled investor funds, and lent them to firms of solicitors, in the hope of benefitting from no-win no fee settlements, made high interest bridging loans, or lent to European SMEs at 20% interest. What links these disparate asset classes? Multiple UCIS involved in each have gone bust.

The advice to move out of a final salary pension scheme, and into a SIPP, was merely a side issue in complaints about the suitability of illiquid, unregulated, and highly speculative off-shore investments.

We’ve been here before. In 1994, the FCA’s fore-runner, the Personal Investment Authority (PIA), instituted a review of pension transfer advice, related to contracting out of SERPS (state earnings-related pension scheme, since renamed state second pension), and into an appropriate personal pension. Ultimately, 120,000 policyholders were found to have been mis-sold, and due compensation.

Now the issue is about the quality of the TVA (Transfer Value Analysis), and the provision of advice which balances a needs-based assessment of the benefits of staying in the final salary scheme, and moving to a direct contribution scheme. These include any guarantees related to inflation-linked pension income. It should also take into accounts the costs of the specific receiving scheme, including the likely expected returns of the assets and all the costs and charges, when deciding suitability.

And so, to the FCA’s latest Consultation Paper (CP), Advising on Pension Transfers (published 21 June 2017).

The FCA explains:

“The existing requirements do not specify what is intended when a pension transfer specialist checks, rather than gives, advice on the transfer or conversion of safeguarded benefits. We have seen cases where a pension transfer 12 CP17/16 Chapter 3 Financial Conduct Authority Advising on Pension Transfers specialist simply runs the Transfer Value Analysis (TVA) calculation or checks the numbers that have been produced rather than looking at the overall assessment and recommendation made as a whole. This is not in line with our expectations.”

“Even when the critical yield is determined correctly, we have concerns that firms are not properly explaining volatility and the transfer of risk to their clients”

The intent behind the CP is to place the onus for appropriate outcomes squarely on the IFA. What it seems to ignore is that firms bent on collecting 1% of a client’s pension value in exchange for transferring it into a SIPP, and then another 3% for introducing the client to a discretionary investment manager, will happily go out of business, leaving other IFAs to pay out for their poor advice to the tune of £50,000 per head (via the FSCS).

In December 2016, The FT reported a ‘Stampede to cash in ‘gold plated’ final salary company pensions’.  It reported:” transfer values have typically been offered at multiples of 30 to 40 times the projected annual pension income -and up to 50 times in some cases -achieving sums of up to several million pounds for individuals on high salaries.”

It’s easy to see why. They can take a 25% tax free lump sum (handy for paying off a mortgage, or setting up children with a decent deposit). The rest can be invested in equity to generate a dividend income.  Under recent pension reforms, can pass on any surplus to their family tax free if they die before age 75 (more generous than a survivor’s benefit of 50% of pension income).

Behavioural economics teaches us that cash now, rather than cash tomorrow, is what people want. The problem is that this insight can be exploited by the unscrupulous.  Enforcd has already discussed the Serious Fraud Office investigation into Capita Oak and others. There will be many other firms which look to divert their clients into SIPPs, and then invest their capital in UCIS which they control.

In the meanwhile, customers should beware, IFAs should undertake careful due diligence of any UCIS offering a rate of return at 6% or more, and a low risk rating, and product producers should set out the liquidity risks that attach to property yet to be constructed, and bets against medical progress. Finally, everyone should steer clear of lending to firms that banks won’t lend to.