What happened to “Freedom and Choice” for people with modest DB pensions?

When George Osborne announced, in his 2014 Budget, that ‘no-one will have to buy an annuity’, the immediate headlines were all about DC pensions. People would be free to access their DC pensions as they wished or let them run on well into retirement rather than (in most cases) turn their pot into a typically rather poor regular income via purchase of an annuity.

Almost as an afterthought, the Government also allowed holders of DB pensions to benefit from pension freedoms, subject to a requirement to obtain specialist financial advice on any transfer worth over £30,000.

Unfortunately, nine years on much more though is needed about the needs of those members who are reaching retirement with modest rights in Defined Benefit arrangements who are looking for greater flexibility in how they access their retirement savings.

At the moment, those members have to go through a somewhat tortuous process. In all likelihood their retirement savings will be above the £30,000 threshold where they need to seek Financial Advice. For many, this might be the first time that they have ever needed or sought advice from an Independent Financial Advisor and even if they have, it might well be that their Financial Adviser is not authorised to advise on pension transfers.

How do you know whether you are picking a “good” Adviser and not a scammer? How do you know what a good service or good advice looks like? How do you know whether the advice is value for money. And how do you understand and compare costs when some advisers charge hourly rates, some fixed fees, and some a lower fee but with higher ongoing advisory charges?

Most members find the cost of advice on pension transfers to be surprisingly high which can be problematic if the transfer value is just over the £30,000 threshold. Fees of £4-7,000 for transfer values of £40-60,000 are hard to rationalise from an economic point of view. Members with transfer values of £30-70,000 can find themselves essentially locked into their existing DB benefit because the cost of advice means it is not economically sensible to get Financial Advice and pursue a more flexible route to access their retirement savings.

The process can also be extraordinarily lengthy by the time an IFA is found, advice obtained, a possible referral to MoneyHelper dealt with and all the paperwork completed. And, of course, there is always the possibility in that process of being exposed to a scammer who can often seem to offer a better, smoother and more “efficient” service than an IFA operating within the FCA requirements.

Is there a better route than this confusing, lengthy and costly process which exposes members to potential poor advice and even worse being scammed out of their savings?

One model which works well for some schemes is appoint one (or more) IFA firm on whom they have undertaken due diligence. Members can then use this firm with greater confidence that they are not dealing with a scammer. And, in many cases, the scheme will subsidise the ‘set up’ costs of this arrangement, meaning that the member only pays the ‘marginal’ cost of advice, resulting in a cost much lower than they might pay on the high street. And some schemes will go even further and make available wholly free transfer advice, for example, at retirement. All of these permutations seem to offer the potential for better outcomes

But there could be other options, including for members of schemes where the trustee or sponsor is unwilling to go down the appointed IFA route.

If I think back to when Freedom and Choice was originally conceived, the possibility was raised of whether Freedom and Choice could operate from Defined Benefit Schemes directly.

Just suppose that Defined Benefit Schemes were required to provide members with either a drawdown option or access to a CDC Decumulation option either from the scheme directly or from an authorised provider.

Trustees could be required to ensure that the provider was authorised, that any investment options were appropriate and that charges were fair. Trustees and their advisers are in a much stronger position to ensure that this is the case than an individual member who may never have accessed Financial Advice previously.

Trustees could also be required to ensure that impartial and clear guidance on the pros and cons of the different options were provided to members so that the members are in a better position to make an informed choice without necessarily having to obtain expensive financial advice. And the possibility of a member being scammed is much reduced.

So the advantages of this would be:

• Members having flexibility about how they access their benefits without having to find and pay for expensive Financial Advice;
• A much shorter process to gain access to their retirement benefits;
• A process that ensures that the options are fair, clearly explained and that any charges are reasonable and investment choices appropriate;
• Members protected from scammers to a much greater degree;

Depending on the exact design, it may also reduce the lottery of whether members have picked a “good” time to take a transfer value.

It is clear that the current process is painfully slow and has high levels of frictional costs and exposes members to some uncomfortable risks in cases where they have been left to find their own advice. For the vast majority of members with benefits with a value in the range £30-70,000 the current process just does not work at all – a clear market failure for which action needs to be taken.

Whilst it will place some additional burden on DB trustees, it must surely be better that members get access to better and greater value options, that they are able to make the right choices for themselves without being exposed to scams or inappropriate investment products. And of course, there might be benefits to the scheme if providing these options reduces funding requirements in the DB scheme.

The current requirements of requiring members to seek Financial Advice if their benefit is over £30,000, the transfer regulations and requirements to flag amber or red transfer requests and referral to MoneyHelper are sticking plasters on an ineffective process. It would be much better to start with a fresh look at the outcomes desired and design a process to get there. For members to put themselves through such a tortuous and expensive process clearly demonstrates that there is a need for flexibility beyond that currently offered by DB schemes.