Thousands of members of final-salary pension schemes are being left to make complex decisions about whether to accept cash incentives to give up valuable benefits, without access to full advice.
This “advice black hole” emerged earlier in the week after the government raised concerns about the incentives used by employers to shift members out of costly final-salary, or defined-
benefit (DB), schemes.
DB schemes are often referred to as “gold standard” because of inbuilt benefits such as inflation-linked annual increases and death benefits for dependants. But, with most DB schemes now in deficit, employers are looking for ways to reduce the costs of meeting these future promises.
The Pensions Regulator updated its guidance on transfer exercises last year after seeing examples of pressure tactics used by employers, and set the expectation that independent financial advice should be offered to members in these exercises.
But a regulatory quirk means that some members offered newer types of incentive are locked out of a suitability assessment by a registered financial adviser. The quirk occurs with Pension Increase Exchanges, or Pies, where an employer offers a cash lump sum or an immediate increase in pension in return for the member giving up any future statutory increases in income, such as rises to keep pace with inflation.
These types of exchanges are different from the better-known Enhanced Transfer Value (ETV) exercises, as they allow members to stay in the final salary scheme, albeit as a reduced risk to the employer.
The government warned this week that Pies could reduce purchasing power by 20-25 per cent after 20 years.
The regulator says that members offered a Pie should seek independent financial advice. But it conceded that Pie exercises fall out of the remit of what independent financial advisers (IFAs) can advise on. “The advice provided by IFAs on Pies is not regulated by the Financial Services Authority (FSA),” said the regulator. “This is a difficult area of incentive exercises, that presents more risk to employers and members making and receiving Pie offers.” The Pensions Regulator said it was “up to employers to ensure that members ‘fully understood’ the decision that they were being asked to make”.
“Financial advisers ‘may help’ in this regard, as may other professionals,” says the regulator, adding that “their independence from the employer is a relevant safeguard in these exercises”. The situation with Pies is different to that involving ETVs, where members have access to full advice, fact finds, risk profiling and recommendations from an adviser on whether a transfer is in their best interest. The FSA says that if an IFA was giving advice, in an area that it does not regulate, “then we have no powers to act”.
One IFA firm that has been hired by employers to assist members in Pie exercises, says it will not offer its full services. “We have decided to make it very clear that the service that we provide to members is guidance only,” says Tim Whiting, head of enhanced transfers with Alexander Forbes, the IFA group. “We will not give them a yes or no decision, but simply help them to understand the issues and implications in their own circumstance. Anything more may be misleading.” The risks to members of acting on an unadvised basis are understood to have been brought to the attention of the pensions minister.
Meanwhile, those who are involved in Pie exercises should be aware that they will have no comeback if they are given advice. “I would hope that if an adviser was approached for advice, they would make it very clear that any pointer they give is not regulated,” says Tony Attubato, head of dispute resolution with The Pensions Advisory Service.
“For the vast majority of people, giving up their pension is not their best long- term option and they should ignore the cash carrot.”
The Pensions Regulator offers some guidance on transfers:
● Transfers are not in most members’ interests, and they should therefore approach any exercise cautiously and actively. Some may benefit from transferring but these cases are likely to be in a minority and, very possibly, a small minority.
● Cash incentives distort decision making.
● Fully independent financial advice should be made accessible to all members and promoted in the strongest possible terms.
● No pressure should be placed on members to accept the offer.