The FT Adviser have recently published this article written by our own Managing Director Tim Flippance.
While defined benefit pension transfers have always been a notoriously slow process, in recent years timescales have increased markedly.
In 2020, prior to the ban on contingent charging, the average DB transfer took approximately four months from an initial client approach to the completion of a transfer.
By 2022, this has almost doubled to seven and a half months, meaning you can now expect a DB transfer referral to take longer than purchasing a house.
Of course, this type of extreme timescale is entirely opposite to most clients’ expectations in 2023: switching bank accounts takes around a week, a cash Isa a fortnight and a stocks & shares Isa around a month. Loans can be taken out at the touch of a button (or click of an app) and funds can be credited within hours.
The net result of this is that the vast majority of client frustration, and even complaints, is now timescale related.
The longest single element of the process is the actual transfer itself.
This is not surprising when you consider the factors motivating those clients wishing to transfer to a flexible personal pension.
According to our analysis of around 1,700 of our clients, nearly half (48 per cent) are either already retired or considering retirement, while around one in 10 (11 per cent) are either seriously/terminally ill or in financial distress.
In the case of the latter, the average owed in unsecured debts is £15,350 with many incurring high interest charges during the long and frustrating wait.
Needless to say, this is also after you have managed to find a company willing and able to complete the transfer – an increasingly difficult thing to do.
Recent research carried out by Aegon has indicated only around a quarter of IFAs still provide DB transfer advice and this number is likely to reduce considerably over the coming years – primarily due to the risks involved for IFA’s in transacting this type of business and the increased professional indemnity costs incurred.
What does average mean?
Although the average transfer is around seven and a half months, in reality there is a large degree of variation. For example, around one in three transfers will complete in five months or less.
At the other end of the scale, about one in five transfers take 10 months or more. In fact, only around 10 per cent of transfers actually take the average of seven to eight months.
We will discuss later what factors impact these widely varying timescales, however the key point is that if you are in the initial stages of looking at a DB transfer with a client, whether you intend to provide advice yourself or refer to a third party transfer bureau, you will need to help them understand the reality of the process.
Why does it take so long?
Based on data gathered in 2022, it is possible to consider the three main parties involved in a transfer separately and an average for each.
Firstly, the client takes around 40 days in total to consider the information provided in relation to a transfer.
In order, this would be the initial triage information, the abridged advice report, the full advice suitability report and, finally, completion of the transfer forms.Secondly, the existing pension scheme typically takes around a month to provide a cash-equivalent transfer value/benefit statement and immediate retirement options, and a further two and a half months to actually complete the transfer.
This type of checking is done with the best of intentions and could help to safeguard against the next British Steel-style scenario.
Finally, the advice. This typically can, and arguably should, take up to two months, encompassing the initial fact-finding, investigation of any workplace pension or other potential receiving scheme, and production of the abridged advice report and full advice report – the latter of course needing supporting TVAS (transfer value analysis report), APTA (appropriate pension transfer analysis), and transfer illustrations.
Unlike the conventional ‘final file check’ in most other realms of financial advice, given the inherent risks involved in DB transfers (for both client and adviser), a robust process should include ‘live’ file checking throughout.
This would incorporate both stages of advice, as well as the APTA and TVAS and any other key figures work that could have a serious impact on client decision-making.
As mentioned above, by far the longest single element of the process is the actual transfer itself.
What has changed in the past few years?
A big change is that regulators have launched a host of new rules applicable to pension schemes, in theory intended to safeguard members transferring out.
Schemes are now carrying out scam calls and/or being referred to third-party services such as MoneyHelper to carry out a more detailed questionnaire with the members.
Initially scam calls are typically 10-12 questions, such as ‘are you aware of the risks of transferring?’, ‘who provided you with advice?’ and ‘were you encouraged to transfer out?’.
In the event that a member ‘fails’ any of these questions, this can result in further delays, while the ‘red-flagged’ transfer is referred for additional checks.
A sense of frustration for members at the end of an already prolonged process is almost inevitable and it is left to the adviser to try and manage this.
MoneyHelper is generally an even more in-depth questionnaire carried out over the phone with the member, and although similar types of questions are asked, due to demand members are generally waiting at least a month for this conversation.
Clearly this type of checking is done with the best of intentions and could help to safeguard against the next British Steel-style scenario, whereby a scheme sees a sudden surge in transfer activity, or members individually being incentivised to transfer for the wrong reasons.
However, members are now faced with a wait for many weeks to arrange an appointment, during which time the transfer is on hold.
Perhaps in part due to their lack of understanding around the advice process regulated by the Financial Conduct Authority (rather than TPR), some administrators are ‘red-flagging’ virtually every transfer and referring almost all members to the government advice service MoneyHelper.
In fact, in early 2023 the two and a half months average for a transfer has become almost a minimum, while the XPS scam flag index (an index of the proportion of transferring members referred to this service) is around 90 per cent as of March 2023, according to XPS Pensions Group.
A sense of frustration for members at the end of an already prolonged process is almost inevitable and it is left to the adviser to try and manage this.
The other big change in the past few years impacting DB transfer advice is the FCA ban on contingent charging, introduced from January 2021.
The quality of administration of the old company DB scheme is the single biggest factor in dictating the likely timescale for any DB transfer.
At that time, abridged advice – a form of simplified advice focused almost entirely on the client’s situation – was also introduced. This works as a means of helping clients to decide whether to incur the full advice charge.
As abridged advice can be provided free of charge, around one in three that receive abridged advice decide not to proceed to full advice, this has helped many clients avoid unnecessary fees while still making an educated decision.
However, this has added at least three weeks to the overall process and while beneficial for most clients, for those with perhaps the most pressing need to transfer it could be perceived as another delay.
Are some pension schemes/administrators better than others?
Yes – in fact the quality of administration of the old company DB scheme is the single biggest factor in dictating the likely timescale for any DB transfer.
Based on individual transfer data from 2022 of the bigger pension schemes, the slowest was Alliance Boots (Boots pension scheme) where the whole process took nine months on average, while the quickest was Babcock International (Rosyth Royal Dockyard), taking just under five months on average.
Of the big scheme administrators, Mercer administered schemes took more than eight and a half months on average, Hymans Robertson around eight months, Capita & XPS around seven months, while Willis Towers Watson transfers typically took around six months total.
Of course, this total timescale takes into account all of the aforementioned advice, and client-related delays. However, this still gives a very good indication of the impact that a well-administered scheme can have.
What can you do about it?
The most obvious point is that clients need help understanding the process of transferring a DB scheme and the timescales involved, to ensure that their plans and expectations are set accordingly.
Many clients will obtain a ‘live’ transfer value with a three-month guarantee date and naturally assume that it is a simple ‘take it or leave it’ decision.
s such, their perception will be that this is a lengthy window to seek and obtain advice, and even that the advice process itself will reflect the simplicity of the situation. However, as we have seen above, this is not the case.
Almost every member of a DB scheme of significant value should consider a transfer at least once prior to taking their scheme benefits.
Given that this is an irreversible decision that will impact the rest of a client’s life, the advice process must be detailed and robust.
For most, the advantage of a ‘guaranteed’ scheme pension and the certainty that this brings to their retirement will outweigh the traditional reasons for transferring – flexibility, control and death benefits.
However, there will always be a proportion whose personal circumstances make a transfer an attractive prospect, and need to take advice accordingly.
But given that this is an irreversible decision that will impact the rest of a client’s life, the advice process must be detailed and robust and clients should be allowed time at all stages in the process to consider their options carefully.
In short, advisers should help clients manage their expectations, plan ahead and where possible ensure that you have plenty of time left on the guarantee date to avoid lengthier delays later.
Where a guarantee date is missed and a new transfer value needs to be recalculated, this typically adds another two months to the overall timescales.
As well as this lengthy added delay, most schemes now apply a fee for a recalculation of around £300 to £400, although the highest such fee we have seen recently was an astonishing £2,400.
Tim Flippance is managing director of Grove Pension Solutions.