The former executive director of regulatory policy, analysis and advice at the Pensions Regulator (TPR) has called for a rethink of ‘sticking plaster’ rules to allow more flexibility for members of defined benefit (DB) pension schemes.
In his blog, What happened to freedom and choice for people with modest DB pensions? David Fairs, now a partner at LCP, said that while people with defined contribution (DC) pensions have benefited from greater flexibility introduced by the pension freedoms of 2015, those with DB pensions are facing some barriers.
He said that the requirement for those with a DB pension worth more than £30,000 ($37,200, €34,800) to seek specialist financial advice before transferring to a DC arrangement, coupled with the reducing availability of high-quality advice and the rising cost of advice, has made it difficult for people with smaller pension pots of £30,000-£70,000 to source cost-effective advice.
He also pointed to the risk faced by individual scheme members, of falling prey to scammers and the struggles they may encounter in finding the right adviser, and in comparing costs of firms with different charging models.
‘Ineffective process’
Fairs said: “The current requirement on 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.”
Fairs suggests that more DB schemes should appoint a nominated firm of qualified transfer advisers, which he believes would cost scheme members less than going to a “high-street IFA”, even if the scheme just covered the set-up costs of the arrangement.
‘Much smoother process’
As another potential solution, he proposes a change in the rules to allow people with modest DB pension pots to access drawdown under their DB arrangement – either directly or through a third party such as a mainstream drawdown provider or a CDC (collective defined contribution) pension scheme – the first of which was authorised by the TPR in April.
He said this would remove the obligation to take regulated financial advice, where scheme members took the former option, but that guidance would still be provided and trustees required to ensure third-party providers were authorised, mirroring to some extent trustee duties already in place, around vetting potential transfers under anti-scam rules.
Fairs added that this would be a “much smoother process” than transferring out of the trust and would still provide robust protection against scamming or selecting an unsuitable or high-cost product.
