Are DB transfers the next sector going on lockdown?
One interesting aspect of the lockdown is how some businesses and practices are adapting very quickly to our new situation. Supermarket delivery vans are everywhere; pubs are offering takeaway meals; and you can join your yoga class online. Unfortunately, one other practice that thrives at times of distress is financial scams targeting people who are confused and vulnerable, and facing an uncertain future.
To their credit, the financial regulators and Money and Pensions Service have recognised this threat, and have stepped up communications warning of pension scams. They are urging people to keep calm, and not to rush into transfer or retirement decisions.
At the end of March, The Pensions Regulator (TPR) gave defined benefit (DB) scheme trustees more ammunition to stop the scams by allowing them to suspend transfers – either new quotes or transfer payments (even if the process had been completed right up to the money being paid across).
Suspending transfers isn’t an easy decision for trustees and they will need advice from the scheme actuary and others. They need to protect the remaining scheme members, but it would mean denying individuals’ their right to transfer at a time when the member may have strong financial needs. Someone’s unique personal circumstances could mean the most effective way for them to access cash is a transfer out of the DB scheme.
If that’s the case, then the individual will not welcome trustees putting a stop to transfers. Especially if, whilst the member waits, the transfer value falls considerably, or the employer goes bust and the scheme falls into the arms of the Pension Protection Fund (PPF).
Trustees don’t have to suspend transfers, and it’s not clear yet how many will do so. But even if they choose not to, many trustees will want to review the terms they offer for transfer values in light of the danger they could disturb the cash flow of the scheme.
TPR has said these new measures for DB schemes will remain in place until at least 30 June 2020, and that it would review this date as things progress.
Where does this leave advisers working on DB transfer cases? They will want to ascertain as quickly as possible what approach trustees are taking. But this will add in another step into an already complicated process, and will only put more pressure on the ability to complete transfers within the set timescales.
What fees to charge in this situation is tricky. Do advisers charge for the work they have done? Or only on completion? Once the curfew is lifted and the DB transfer process starts again, they will need to consider their next move. The transfer value is likely to change in the intervening period, and that may mean more work reconsidering the suitability of the transfer. Do advisers charge for this additional work? The situation has the potential to turn into a bit of a mess.
The FCA is also keenly watching this area. Assessing the suitability of DB to defined contribution (DC) transfer advice has been a key plank in the FCA’s strategy over the last couple of years, and its Business Plan for 2020/21 shows that isn’t about to change any time soon. It has also issued further guidance to those giving advice on DB transfers against the backdrop of the COVID-19 outbreak.
The FCA expects the file to evidence the suitability of the transfer. However, it’s easy to envisage how a DB scheme, where the administration staff has relocated to working from home, may be tardy in producing documentation at the current time. But that’s no excuse in the FCA’s eyes. Again, this will put pressure on timelines.
It also gave some warning shots across the bows about judging suitability in today’s climate. Transfer values may go up, given the change in economic factors. If that’s the case, the FCA warns that a higher transfer value doesn’t automatically turn it into a suitable transfer. Death benefits will also be at the forefront of many people’s minds. But again, the FCA is going back to basics, warning advisers to also consider alternative ways of providing cover, such as life assurance policies. And, finally, with many businesses under pressure, advisers should fairly reflect the benefits of the PPF in conversations with clients.
DB transfers face unusually tight time pressures at the best of times. There is no doubt that the current crisis is only going to make those time pressures worse, or even remove the ability to process the transfer at all. Advisers are going to need to reassure their clients through this period, and be ready on the other side when any transfer ban is lifted.
This article was previously published by Money Marketing