Defined benefit pension transfers

This appears to be the issue at the front of most advising firms minds at the moment.

Firms are wrestling with upside (enter the market) and downside (stay away) risk management.

There are often very good reasons to advise against staying in scheme pension at the moment. The question is, on entry into the market, how do you minimise your risk?

This essentially boils down to managing FCA (regulatory) and FOS (claims) risk.

We are comfortable with our process format, but recently we saw a process that was exceptionally good, in our view, in one of our file reviews. We tweeted about it recently.

From a regulatory point of view we need to be mindful of the 3 key tenets of suitable advice.

  • Is it in the clients’ best interest?
  • Has the client been fully informed?
  • Has the communication with the client been fair, clear and not misleading?

Within that framework, the firm in question has a process that goes something like this:

Step 1: Compare the scheme pension with a mirror and level annuity, and drawdown WITHOUT taking ANY notice of the member’s financial and personal circumstances. Invariably, the result will be that the scheme pension is better than anything else. The brilliant win in adopting this stance is that the adviser deals directly with the FCA rule that requires the starting point to be “its not suitable” (COBS19.1.6).

Step 2: Analyse the target monetary objectives of the member relative to the scheme pension / annuity / drawdown, taking INTO account ALL the income and liquid assets that can be brought to bear to satisfy those objectives. Our standard position is to do this using a cash flow modelling tool, making sure that the starting assumptions are reasonably stress tested for a catastrophe. Please note that we always suggest that the cash flow scenarios include modelling the death of the member prior to the spouse. This stage plays to COBS19.1.3 (taking all the clients’ circumstances into account) and COBS9.2.2 (client is able to bear the investment risks inherent in the advice).

Step 3: Make a recommendation, INCLUDING ALL ancillary benefits not already considered. In taking step 3, it is imperative that if the modelling of the scheme pension in Step 2 shows that clients will sustain an income sufficient to meet their objectives, then the advice should be NOT to proceed, unless there are other compelling reasons. (It’s not the purpose of this blog to consider those.)

As usual, hopefully this is helpful.

Sadly its also important to just say that in spite of this note, the buck stops with the regulated firm / adviser and reliance on this, our interpretation of the rules is a risk that remains with you. In essence the purpose of the blog is to help you risk manage a high risk strategy if you decide on an the upside risk route.