Posts Tagged ‘Financial Advisers’

Valerie Hartley

Shopping for an Annuity

Buying a pension annuity is an important one-off decision. It is therefore crucial that people take advantage of extra income if available to them when converting their pension fund savings into an income for life. The only way for annuity purchasers to ensure they are not missing out on extra income is by shopping around to compare annuity rates and income offers. Read more »

Alan Collins

Open market option for all?

I read with interest the guidance to individuals with money purchase benefits published on 2 November by the Pensions Regulator (tPR) and echo comments from Pensions Minister Steve Webb that “choices we make at retirement are amongst the most important of our lives” and “shopping around can provide better value for money and significantly boost retirement income”, and those from tPR’s acting Chief Executive Bill Galvin who has stated that “members could miss out on a higher retirement income because they are not well-supported in making good choices”.

The engagement of the Pensions Regulator in the education process within occupational defined contribution schemes is welcome, and emphasis has rightly been given to the potential benefits to members of obtaining independent financial advice. In particular, the guidance should act as a reminder to Trustees of schemes which provide both defined benefits and money purchase benefits that the members with money purchase benefits deserve due care and attention.

However, the guidance appears to be in stark contrast to the regulatory approach and pending legislation governing defined benefit arrangements, particularly those containing contracted-out rights. The “presumption of guilt” surrounding transferring benefits out of a defined benefit arrangement, and the potential end to the ability to transfer contracted out rights from defined benefit to money purchase arrangements in 2012, would seem to be at odds with the ethos of encouraging members to make choices which best suit their own circumstances.

For example, the value contained in some defined benefits (such as a prescribed level of pension increases or spouse’s pensions where the member is single or where the spouse already has a substantial pension), could be used to provide alternative benefits which are more suited to the needs of the individual concerned. Also the value of a money purchase pension pot can be retained on the death of the member, whereas this event may cause the value of a defined benefit to be significantly eroded .

I would therefore ask that members of defined benefit arrangements continue to be afforded the same opportunities to exercise their “Open Market Option” in the future.

Neil Copeland

As those of you who know their French medieval history will recall, Arnaud Amalric was the Abbot of Citeaux at the time of the supression of the Cathar heresy in the Languedoc. The French Catholic king of the time, with the blessing of the Pope, had launched the Albigensian Crusade , aimed at exterminating the heretics. Because the Cathars had for many years lived happily amongst their Catholic neighbours, the crusaders were presented with a problem – how can we tell the “good” Catholics from the “bad” Cathars before we exterminate them?

This is where Arnaud comes in. Arnaud was what we would call in morden parlance, a pragmatist. He was with the crusaders beseiging Beziers, presumably to provide spiritual and moral guidance. Beziers had a mixed Cathar/Catholic population. When asked by his military colleagues for some guidance as to how they could distinguish the religious adherence of Beziers’ inhabitants in the forthcoming massacre and therefore avoid killing their “good” co-religionists, Arnaud came up with a splendidly pragmatic  response – “Kill them all, the Lord will recognise His own.”

Now don’t get me wrong, generally I see pragmatism as a virtue, but I’m not entirely convinced that, in this case, the end justified the means.

Equally, I am unconvinced that the effective banning of Contracted out DB to DC transfers hidden in the regulations regarding the abolition of DC Contracting-out is entirely justified.

The Government’s approach here seems akin to that of Arnaud. The proposed ban is clearly about a failure of regulation. There are many legitimate scenarios where transferring from a Contracted-out DB scheme to a DC arrangement of some sort makes sense for individuals, given their particular circumstances. Given this, and the fact the the Government will not have sat down with any individuals to ascertain what is or isn’t in their interests, killing all Contracted-out DB to DC transfers seems as overzealous now as Arnaud’s response all those years ago.

So rather than a medieval approach to the issue of transfers and regulatory concerns about protecting members from themselves, can we  have some proper regulation?

By this I emphatically don’t mean the recent consultation document issued by the Pensions Regulator on incentive exercises. It has always been my view that transfer advice is regulated by the FSA and trustees should not be forced to provide a figleaf for any regulatory failings in this area – see our other blogs on this point.

Having said that I think that the guidance around the trustees’ role in this area seems to have completely missed the point that trustees do indeed have a legitimate existing role in the process which could help resolve some of the concerns voiced. It is already the trustees responsibility to set scheme transfer values. The Regulator in its guidance in this area suggests that these can be a ‘best estimate’ of the value needed to replicate the benefits being given up by the member. So setting the transfer value basis for a Scheme rests squarely with the trustees.

If trustees and the Regulator have concerns about members losing out as a result of transfers, even where these are topped up to the full transfer value provided by the Scheme, or beyond, then clearly part of the problem must be the trustees’ transfer value basis.

In my opinion the biggest and best contribution trustees can make to the whole transfer value debate is to make sure that their transfer value basis genuinely reflects the value of members’ benefits.

Obviously this is yet another area where there is a potential for conflicts of interest – some trustees might be tempted to set weak transfer value bases with a view to facillitating positive communication in employer sponsored transfer exercises. A 20% “enhancement” to a weak scheme transfer value could well be less than 100% of a “fair” transfer value and mislead members into thinking that they are getting something “extra”. This is properly an area for scrutiny by the Pensions Regulator and another argument for the appointment of a professional trustee to any Scheme where potentially contentious issues are to be addressed.

This may raise the bar for transfer value exercises by increasing the amounts of any top ups required from the employer – but surely this is a good thing? Transfer exercises would then – quite rightly – be difficult to do “on the cheap” as disclosure requirements would mean that the full transfer value has to be disclosed to the member and any attempt to “incentivise” members’ to transfer out at a level below this would be very apparent to them.

I have to ask if this would not be a simpler and more joined-up solution than a blanket ban by stealth, which appears to be where we are heading?

David Davison

I read with interest the comments made by TPR Chairman David Norgrove about the use of transfer incentive exercises, Mr Norgrove suggests that trustees should become heavily involved in policing such exercises. He also suggests that trustees’ default position should be to treat exercises with scepticism and asserts that they are unlikely ever to be in the members’ interests.

Yet only a week earlier, as reported in our blog,  Fraser Sparkes from leading legal firm Hammonds was suggesting that trustees should not become involved with ETV exercises as it goes beyond their trustee responsibilities. As if being a trustee wasn’t complicated enough!!

Mr Norgrove also described a number of “worrying tactics”  including the offer of advice paid for by the employer, on the condition members take that advice, excessive pressure to make a decision and the provision of misinformation. Whilst clearly I would not condone any of these tactics it would be interesting to know just how widespread these abuses are or if a few isolated incidents are colouring the Regulator’s view as a whole.

The provision of independent financial advice on pension transfers is one of the, if not the, most heavily regulated areas of financial advice and it’s hard to believe that such practices are widespread where IFAs are involved in the process. If the abuses alluded to by Mr Norgrove are indeed widespread, then surely it represents a very significant breakdown of the regulatory process and the FSA need to be provided with names of the parties involved to allow them to investigate thoroughly and take appropriate action.

In my experience highly reputable firms of IFA’s with highly qualified advisers who offer to provide transfer advisory services do so based upon the facts and figures presented to them and take a very cautious approach to any positive recommendation to transfer. All parties work within the guidance issued by the Pension Regulator in January 2007. In our view there is no benefit to a company in doing anything other than ensuring that members can be clearly demonstrated to have made an informed decision as regards their pension options in this scenario. To do otherwise is to leave open the possibility of a member claiming that he did not understand the decision he was making, or worse, was actively misled, and a court or tribunal directing that the liability has therefore not been properly discharged, with the Employer held to be still liable for the “transferred” pension benefits.

As noted above Mr Norgrove also states that “In general it is unlikely to be in members’ interest to transfer out of a DB Scheme.” However, that is not to say that it is never in a member’s interest and clearly depends on the level of transfer value offered in exchange for the benefits given up in the final salary scheme. It will also depend on a wide range of softer issues directly linked to a member’s personal circumstances e.g. health, attitude to risk, etc. I think it is very dangerous for trustees, and indeed Mr Norgrove, to make an assumption about what is in a particular member’s interests without having fully investigated an individual’s personal circumstances and objectives. Certainly any IFA adopting such an approach would be leaving himself open, quite rightly, to disciplinary action by the FSA.

Each individual will have a choice to make based upon the figures and their personal circumstances and ideally with the benefit of independent financial advice paid for by the employer. In this area there must be no additional incentive for advisers to encourage transfer, such as by the payment of a commission, but be based upon a fee payable regardless of the recommendation given.

Only if the offer represents true value for money is it likely to be recommended by the adviser and accepted by the member. Anything else just leaves the adviser open to a future claim and to pursuit by their regulatory body.

It is also interesting that by their very nature these exercises will be time pressured as any transfer offered will only be guaranteed for a limited time and as top-ups could swing wildly companies will need limit the extent of their commitment within this timescale. Frequently members are unaware of this and if pointed out could look like undue pressure is being exerted. 

When attractive top-ups are made available along with high quality financial advice, ETV exercises represent a legitimate risk reduction tool for scheme sponsors and ultimately an attractive alternative for individuals who have a right to chose what is right for them rather than having someone take that decision on their behalf.

Finally, Parliament has seen fit to make the FSA responsible for the regulation of the provision of financial advice, including advice on pension transfers. Given this, and noting the legal view mentioned above about the limits of trustee responsibility, I would question whether trustees should have a role in regulating financial advice thrust upon them as suggested by Mr Norgrove. Trustees should take their own legal advice about their responsibilities in this area and the potential consequences of any actions or inactions on their part.

David Davison

Get me DCI Gene Hunt

An e-mail flew in to my in box this week which transported me instantly back to the 1980’s and those heady days of big hair, unfeasibly large shoulder pads and shiny suited insurance salesmen with mobile phones and bloated salaries.

The e-mail contained details of a tender for North Lanarkshire Council requesting bidders for the provision of independent financial advice for their employees. No problem so far, an enlightened local authority looking after the needs of its staff in a caring, sharing type way.

The time machine only started working as I read on and the document suggested, and I quote, that “the provision of independent financial advice is to be at no cost or liability to North Lanarkshire Council and there should be no charge to individual employees in respect of the advice service, although it is expected that the organisation will receive commission on product sales where employees chose to take up the options offered.”

Charge up the Quattro and get me another bottle of Perrier.

Alarm bells, or was it police sirens, went off in my head. Without wishing to be too hard on the Council’s well meaning intentions this whole proposal raises some pretty fundamental issues.

Firstly, that 20 years on, there seems an implicit suggestion that financial advisers continue to be remunerated with commissions that dramatically exceed the cost of the advice given and that anyone who wants it should be able to obtain financial advice for free! This is quite clearly no longer the case and with full commission disclosure, the compulsory option to pay by fees, and the imminent implementation of the FSA’s Retail Distribution Review it’s impossible to buck the system.

Secondly, the tender also asks that the adviser “run seminars and financial clinics at the request of North Lanarkshire Council, [and] provide free promotional literature in the form of leaflets, posters etc. for distribution to employees”.

The implication that the actual advice delivered will be of such low value relative to the “product sales” that there will be sufficient cross subsidy to allow costs for an all employee communications and seminar programme at the request of the council, raises other issues – such as just how much remuneration does the poor individual taking up the options offered need to generate to cover all of this and how competitive is what is being offered with what would be available in the open market?

Fundamentally a commission payment is an agreement between the client receiving the advice and the adviser providing it, not some short cut to employee benefits on the cheap, or a cross subsidy for an employer’s communication obligations. Commission, where paid, is of a much lower order than historically has been the case and tends to be spread over a much greater term of the contract with commission clawback a very real possibility where any agreed product is not maintained. It also has to be remembered that much of the best financial advice involves taking actions that do not result in any product sale.

Can the Council really justify this approach as being in the best interests of their staff?

This whole issue highlights some thorny issues about the difficulties of accessing quality advice in the modern workplace, but as a starting point a structured Financial Awareness and Education programme for employees, funded by the employer, would be much more 2009 and less 1989.

With the great strides made to professionalise the financial advice market and improve the quality of advice this really is, unlike ‘Ashes to Ashes’, a very unwelcome return to the 1980’s.

David Davison

Apparently a 15 year old whizzkid from Germany has corrected NASA scientists on the probability of an asteroid called Apophis hitting earth. While NASA estimated a 1 in 45,000 chance, Nico Marquardt suggested 1 in 45, which NASA ultimately concluded to be right. Read more »

Brian Spence

Specialist actuary, Spence & Partners, who provide actuarial support to Independent Financial Advisers, have launched a longevity calculator.  The calculator, which is free to download from the Spence & Partners website looks to assist financial advisers and their clients in evaluating life expectancy as part of the process of establishing cash flow requirements in retirement. Read more »

David Davison

There has been much written recently about the potential pitfalls of so called ‘inducement exercises.’ Whilst some of the concerns are valid I believe that provided those participating take the time to understand the recent regulatory guidance and the roles of various parties in the process then the risks are lower and more manageable than they might appear at first glance.  Read more »

David Davison

There has been a huge amount of what I can only describe as ‘hype’ in the popular press and financial magazines over recent months, almost wholly negative, about the practice of employers topping up final salary scheme transfer values to allow members to exercise a real choice in relation to their pension benefits.   I wouldn’t wish to suggest that reporting on this matter approaches the worst excesses of the fourth estate (“Freddie Starr ate my Hamster” or “London bus found on Moon” for example) but headlines such as “Bribes offered to quit final salary schemes”1 and “Regulator launches probe into growing ‘cash for company pensions’ scandal”2 certainly leave scope for a more considered and balanced assessment of the issues. Read more »

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