The Lack of Regulation of Transfer Incentives

David Davison

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Many years ago an old auntie used to tell me to be careful who I pointed the finger of blame at, as only one finger would point at them and the other three would point at me. Wise words indeed – and possibly something that the Pension Regulator should pay some heed to when making pronouncements.

We agree entirely with the Pension Regulator’s conclusion that there has been sharp practice in the advisory processes used by some firms in relation to ‘enhanced’ transfer offers and this will have lead to members making ill judged decisions. Exercises have mistakenly been turned into conveyor belt processes with insufficient funding and little acknowledgement of the requirement for individually tailored advice, however I can’t help feeling that some of the proposals in the recent consultation on Transfer Incentives are ill thought through and narrowly focussed.  The motivation behind the proposal to end transfers from contracted out DB schemes to DC schemes remains unclear but may be part of the same regulatory reaction.

I have to ask whether the underlying problem is the inability of Regulators to regulate these activities rather than any fundamental problem with the system as it stands. Undoubtedly adequately tight regulation combined with a high profile case where the advisory firm and/or the employer involved were forced to compensate for any processes which fell outside the required standard would raise awareness and set the benchmark for the future. If employers and advisers are guilty of inappropriate practice then this should be weeded out so that those who perform within the required advisory process can continue to provide the quality service required.

The Financial Services Authority seems unwilling to properly update the regulation of transfer advice and we can only assume the near outright ban proposed by the Department for Work and Pensions has been the only option to protect the majority whilst removing the flexibility of the minority.

This whole transfer process only works on the basis of members taking decisions  based upon informed consent. The current regulatory process, built like a phoenix from the ashes of the pension mis-selling scandal of the 80’s and 90’s, provides a framework for this – providing the process is diligently followed.

Having said that, in my opinion there has  been a failure on the part of the FSA to update the advisory process over the past 10+ years to the point where it is now incompatible with the requirement to protect member’s interests. Advisers have been forced to work within a regulatory framework which does not make it easy to properly advise clients. The transfer analysis systems used to advise clients are a throwback to the technology of bygone years and ill suited for the purpose. There is too much focus on the critical yield and not enough on giving individuals useful information upon which they can make a decision – such as stochastically modelling the likelihood of certain outcomes and updating assumptions on a basis more frequently than yearly.

Systems and processes have improved but the regulatory framework has not adapted to meet what is actually needed by both individuals and their advisers. So advisers are forced to do a job with one, if not both hands, tied behind their back.

It is also interesting that the Pension Regulator’s draft Guidance has focussed narrowly on pension issues and yet this does not reflect the advisory process against which advisers must operate. Advisors need to consider all the financial issues and their relative merits. Is the Regulator, or indeed a scheme trustee, in a position to judge if the payment of a credit card or a mortgage is more or less valuable for an individual than retaining value in a pension? I would have thought not, in the same way that a trustee should not be forced to start from the assumption that a transfer is not in the members interests. Only a financial adviser in possession of all the facts and with suitable qualifications is competent to make such a judgement and indeed is required by regulation to do so.

Obviously, the Pension Regulator has tended to be exposed to examples of bad practice in this area rather than good and this appears to have skewed its perspective and heightened its concerns.

The Pension Regulator’s proposals will undoubtedly help in ensuring that financial advisers are not selected on the basis of their propensity to recommend transfer.  With the involvement of professional trustees and/or advisers, communication should be subject to genuinely independent scrutiny which will be helpful.  

However the Pension Regulator, but more particularly the Department for Work and Pensions and the Financial Services Authority are abdicating responsibility in coming up with a solution which needlessly removes choice instead of just meeting the problem head on and as the same auntie used to say to me – just pull their finger out!!.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers