DB transfers: Regulatory review on the horizon?

Russell Investments' Nick French recently spoke to Retirement Planner about what impact an FCA review could have on pension transfer advice

In light of the unprecedented demand for pension transfers, Russell Investments used the RP Forum to take a closer look at whether the area is ripe for regulatory scrutiny. RP spoke to the firm's head of UK Nick French to find out more.

How likely is a thematic review on defined benefit (DB) transfers?

There has been a surge in demand for pension transfer advice thanks to the increased flexibility given to defined
contribution (DC) drawdown and low interest rates causing very high transfer valuations.

The sums involved in pension transfers are huge. There are some people who suddenly get control of a pot just shy of £2m, which makes their financial planning needs and outlook change completely.

This creates a desire for oversight – for someone to look at what is going on. Experts have suggested they expect
the Financial Conduct Authority (FCA) to investigate 100 firms in relation to DB transfers.

The legislative change caused by pension freedom, the evolving needs of consumers generally and the fact that the market is at a record high makes a thematic review seem likely.

How can advisers prepare for a review?

There are three main risks for advisers to be aware of: sequencing risk (taking money out at the wrong time),
longevity risk and inflation risk.

The main thing advisers can do is focus on products that are "outcome based". These are products that are clear on what they are supposed to do and deliver, for example a targeted return for a specific risk profile.

If a fund is extremely volatile and someone takes money out when the market has fallen, it can cause real pain to a portfolio. The predictability of returns is extremely important.

Advisers might want to consider what stress-testing has been done on a portfolio.

There are already tools for people to use in the accumulation phase, but it is also useful to stress-test the
decumulation phase. For example, what would happen if the market falls X% or the oil price increases X%?

This is a type of futureproofing. It is also possible to look at what would have happened to the portfolio in the past –
for example, if we had another 2008-09 or another tech bubble.

We have stress-tested all of our portfolios and we could potentially widen this out to help stress-test clients' portfolios.

How would you counter the criticism of targeted return funds?

I believe most people want to be clear on what a fund will do. If the fund achieves that, it has been a success.
Sometimes, targeted return funds are compared to their peers or to a benchmark which have different objectives.
This can result in what looks like a performance discrepancy.

With our funds, we have a return objective and a risk objective. We look at whether we have achieved both those objectives.

Would a thematic review result in a slowdown in transfer demand?
I think the review could result in two conflicting outcomes: advisers being wary about giving advice on transfers; and consumers panicking because the high transfer values might not last forever.

The main fear is that there is inertia. The hope is that the industry will be doubly careful and ensure a transfer is the right decision for the client.

It is a challenging situation, but I think a review would be great for demonstrating the importance of financial advice.

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