Jonathan Watts-Lay, Director, WEALTH at work, a leading proving of financial education, guidance and advice in the workplace, joins PMI TV to discuss the issues surrounding pension transfers and what can be done to protect members.
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Alternatively, please see below for the transcript of the interview.
PRESENTER: DB (defined benefit) pension failures have been making headlines recently, casting into the spotlight the support that members receive. So joining me now to discuss DB transfers, and also how best to protect members, is Jonathan Watts-Lay who’s the Director at WEALTH at work. So Jonathan, it’s good to have you with us today.
JONATHAN WATTS-LAY (JWL): Hi.
PRESENTER: So let’s start then with DB transfers, and why is there this interest by members?
JWL: Well I think there’s a number of reasons. One of the key reasons is because of the transfer values on offer. It’s not unusual at the moment to see 30 or 40 times income. So I think people are almost quite overwhelmed by the fact that they could be getting £20,000 worth of income in retirement, or they could be getting a transfer of £800,000, and they probably can’t see beyond that £800,000 because it’s such a phenomenal amount of money. So I think it’s the multiple that is attracting a lot of people. But I think there are some other reasons as well.
I think there’s the issue of people wanting flexibility. So since freedom and choice came in I think there is definitely a cohort of people that say, ‘Well actually I’d rather have that money in my own pension account where I can do whatever I want with it’. And for some people that will be around inheritance tax. Because rather bizarrely now pensions are quite a good inheritance tax planning tool if you’ve got other assets that you can live off. And I think probably the other thing as well is that a lot of people who are in DB schemes, they read the headlines, they see what’s been going on with BHS and British Steel, more recently Carillion, and I think there’s just this issue of, ‘I’d rather (metaphorically) have that money in my own back pocket than leave it in the scheme’ – where they believe there is some danger of maybe not getting that money. Even though that could of course be misplaced in most cases.
PRESENTER: So then what could schemes, trustees and indeed employers do better?
JWL: Well I think there’s a number of things. The first thing is do people need to go straight to regulated advice? Because even though the rules say that if you’ve got a value of £30,000 or more in a DB scheme, you must take advice, the question is would guidance help them before they make that decision on advice? So we would urge employers and schemes to look at this because guidance can give people the advantages generically and the disadvantages generically of moving out of a DB
scheme, which may then influence people to say, ‘Well actually this isn’t really for me’, and therefore not go for financial advice. But if they do go for advice they understand why they’re going for it.
I think there’s also an issue about employers and schemes actually going and getting reputable firms to facilitate financial advice. We’ve seen the factory gating down in South Wales, we’ve seen some of the extortionate charges that are being made. Whereas actually if the schemes and the employers went out and found advisers that could deliver financial advice, and did their due diligence, compliance checks, looked at the compliance processes and agree a price that employees would ultimately pay, I think that would really help make the whole process far more robust.
And thirdly I think the whole idea of partial transfers; currently only about 15% of schemes allow partial transfers. Whereas actually if that became much more widespread then actually maybe there’d be a much better management of risk, where people would say, ’Well actually I do want to transfer some of it, but I’m happy to leave some of it where it is.’ And that might be a better outcome for all.
PRESENTER: What dangers do you see in the current market?
JWLI think there’s a number really. I think that there’s quite an overegging of transfers. And you see this even in bulk exercises, where it’s not just the individual waking up one morning and deciding they may want to transfer. But actually where the scheme and the employer is saying, ‘Well let’s look to see if we can do a bulk transfer of people out of the scheme.’ And the expectation of the numbers of people that will transfer out in a lot of cases seem very high. So I think there’s almost this expectation of the numbers that should transfer, which perhaps is beyond where they should be, and beyond reality. Of course you never know until you meet those individuals and understand their individual circumstances.
We’ve also seen examples of where again there’s been factory gating, where maybe localised advisers, maybe one or two-man bands pitching up at a workplace and all of a sudden transferring out quite a large number of people. And when you look at what happens to that money, where does it go? We’ve got a lot of examples of where it’s going to a single provider, a single insurer. So it raises a red flag there which is really saying, ‘Well hold on a minute – why are insurers taking all this transfer money?’ Which often because it’s large sums, can run into millions and millions of pounds in total. Why is there not a red flag going, ‘Well hold on a minute, here’s a one man band or a two-man band adviser, we’ve hardly had any business from them before, now all of a sudden we’re getting millions of pounds’ worth, and it’s all DB transfer?’ To me that sounds like a bit of a red flag which probably should be addressed.
PRESENTER: And the likely impact on individuals, what would you say they are?
JWL: Well I think there’s a number of issues here. I think that a lot of individuals will probably transfer when perhaps they shouldn’t. We’ve already seen the numbers from the FCA in research they did quite recently where they were sampling cases. They suggested that roughly half of those perhaps were unsuitable for transfers. So that’s an alarm in itself. I think there’s also the issue of individuals who even if maybe they’re advised that they shouldn’t transfer, that the individual says, ‘Well it’s my money, I want to transfer anyway.’ So the insistent client issue. Which I think then plays back to partial transfers because actually maybe there’s some balancing of that risk if actually they would accept a partial transfer (if they were allowed to do it, of
course, by the scheme). And I think there are also issues around what the individual does with that money once it is transferred.
One of the concerns that we have is that as people go into retirement, if they’re in drawdown for example, are they getting ongoing advice? What happens 10, 15, 20 years into retirement? Particularly we know cognitive ability reduces as people get older, so how is that being managed? So I think there’s quite a lot to be concerned about.
PRESENTER: Jonathan, thank you.
JWL: Thank you