DB transfers: getting better outcomes for members and schemes

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Our 2019 Big Schemes Survey highlighted the increases in the amount of individual member transfer values paid out of defined benefit (DB) schemes over the last few years. 95% of schemes in the survey saw an increase in transfer volumes from 2018 to 2019, with a third of schemes seeing transfer volumes triple. FCA statistics show that nearly 235,000 individuals received DB transfer advice between April 2015 and September 2018.

As a result, 2019 saw the FCA expressing its concern, following an extensive data collection exercise, over the suitability of the advice being given in DB to defined contribution (DC) transfer cases. Despite this, we do not see member demand for transfers reducing significantly. 

Left to their own devices, it will become harder for members to find a suitably qualified adviser. More firms will stop offering this service as a result of the increased regulatory requirements for having DB transfer permissions and the increasing costs of professional indemnity insurance.

Combining this with concerns over the levels of contingent charging – the FCA found instances of contingent charges of up to £30,000 on the largest transfer values - and the suitability of the receiving vehicles and the charges in them, we are seeing more focus from scheme sponsors and trustees on providing support for members who want to look at the pros and cons of transferring.  An increasingly common view is that it is no longer sufficient to give the members a transfer value and “let them get on with it”. When it comes to supporting members on transfers, it appears the risk of doing nothing, is now higher than the risk of doing something.

Supporting your members

Transfers are an emotive subject. However, with a robust support framework, built on solid due diligence and technology, it is possible for members to make the right decision for them and for scheme sponsors and trustees to benefit from settling benefits and reducing risk.

A flowchart illustrates a process involving a "Company," "Administrator," and "Member," detailing connections through components like a "Portal," "APTA tool," and "IFA." Arrows indicate pathways between elements.
  1. OPTIONAL: Company makes offer to member
  2. Member requests early retirement or transfer value quote or receives the usual scheme benefits pack in advance of reaching normal retirement age
  3. Administrator calculates figures and sends pack to member
  4. Administrator sends locked data to Portal
  5. Member accesses Portal and agrees to release data to Me2
  6. Data unlocked on Me2 and member selftriages
  7. Member contacts IFA for advice (and agrees to release unlocked data to APTA tool) via the portal
  8. IFA uses APTA tool to advise member
  9. Member receives personal recommendation makes decision and notifies IFA
  10. IFA informs the Administrator of member response
  11. Normal administration processing of selected benefit option (do nothing, transfer or retire).

This framework is split out into four parts:

The first part of any support framework is to find an appropriate firm of advisers to partner with. There is a relatively small market of advisers who specialise in DB transfers and, using our extensive due diligence on them, we can help sponsors and trustees select a firm to work with. Having one firm gives economies of scale, in terms of cost (regardless of who is paying for the advice) and will reduce the pressure on the scheme administrator as it will not have to respond to a myriad of different transfer information requests from different IFA firms.

The messaging and education provided to members is key. Communications should clearly provide generic, balanced information on the advantages and disadvantages of transferring and how to investigate their options in more detail. These can take the form of videos, website content or good old fashioned paper, depending on what works for the scheme’s members.

Clearly, it is in no one’s interests for members for whom a transfer would be totally unsuitable to proceed to the advice stage (especially if the member is paying for that advice) and so the framework should provide some means for members to make this judgment themselves. However, the latest FCA guidance makes it hard for IFA firms to offer triaging services*.

*www.fca.org.uk/publication/consultation/cp18-07.pdf

www.fca.org.uk/publication/policy/ps18-20.pdf

www.handbook.fca.org.uk/handbook/PERG/12/Annex1.html

The final piece of the framework is to ensure that the Appropriate Pension Transfer Analysis (APTA) that the member adviser has to carry out is done efficiently and correctly.  Our APTA tool can be used by advisers in a bulk transfer exercise, as well as in part of an embedded business as usual transfer support framework.  It enables the adviser and member to build a credible retirement plan and to then investigate whether transferring increases the chances of the plan being met or not.

Where had all the scammers gone? Suddenly, every day wasn’t another sage of escalating threats and attempts at intimidation from the liberation boiler rooms. Weeks could go by without anyone threatening our jobs, reputations or businesses. Had the overseas transfer charge driven the overseas scammers into permanent retreat? Or were they just rapidly googling how to re-register their schemes somewhere within the European Economic Area (EEA) to circumvent the charge?

An FOI request from Royal London to TPR, reveals £60bn of DB transfer activity since the introduction of pension freedoms, with £34bn in 2018/19 alone (close to 250% of the previous year’s figure) and more than twice as many individual transfer cases (210,000 compared to 100,000 in 2017/18).

 

The elements making up the support framework will take the pain out of the administrative process and empower members to make better decisions with better outcomes.  That must be good news for them as well as the scheme sponsor and trustees.

We expect many firms may need to increase their reserves for travel insurance in the short term.

The travel industry is severely affected by coronavirus, with flight and hotel cancellations across the globe. Insurers will have to pay claims where cancellations were in line with terms and conditions. However, we have seen that many insurers have avoided claims through a strict interpretation of their terms and conditions; e.g. abandoning travel to countries where the government hasn’t advised against travelling to those countries. Note that policyholders can try and recover their money under contract frustration which would avoid making an insurance claim.

The decline of travel activity in the coming months may bring some reprieve to travel insurers as the frequency of claims begins to dip, due to new coronavirus exclusions placed on new policies or through amendments to existing annual policies. However, it is noted that there will be a significant fall in exposure (and revenue) for insurers in this market.

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