Since A-Day, the rules in the pension market have changed considerably, but how are the changes in legislation that were implemented three years ago affecting the growth of the transfer market?
In football, the transfer market appears to be completely immune to the ongoing credit crunch, with record levels of spending showing the recession has not yet caught up with the game's big-spenders. Manchester City's recent failed £103m bid for AC Milan's Kaka proves there is a lot of life left in the transfer market, with more to come in the summer.
Of course, not everyone approves of the football transfer merry-go-round with players switching from club to club. There are also regular calls for more regulation, as well as constant speculation that the merry-go-round is bound to stop spinning at some point soon as financial reality sets in.
The comparison between the football and pensions-transfer markets is not perhaps entirely clear. There is a bit of a shortage of glamour in the pensions-transfer market and there are probably not too many individual £100m transfer cases kicking around.
But there are some points of comparison. The onset of A-Day in April 2006 has changed the rules in the pension market with money moving into Sipps and personal pensions, and the recent figures for transfers show healthy evidence of growth. The pensions-transfer market is bigger than football's though.
The ongoing stock market volatility, with the FTSE 100 heading back down to the 4,000 level in mid-February 2009 compared with more than 6,300 in May 2008 and the record low for UK interest rates, might have hit confidence in the wider pensions market but it has not dented the transfers market.
Just as there is criticism of the football transfer market there is - quite rightly - criticism of pensions transfers and the focus of regulators is on concerns that people are being wrongly advised to switch.
There is, though, a genuinely crucial difference between the pensions and football transfer markets. It is not hard to see football clubs finally running out of money for transfers but it is very difficult to see the pensions-transfer market grinding to a halt.
The transfer opportunity
It is clear the pension-switching market represents a huge opportunity for advisers. Recent figures from the Association of British Insurers for new business premiums show pension transfers are worth around £10bn a year.
That easily outstrips the market for drawdown, which is estimated to be worth around £3bn annually. Advisers should definitely be focusing on transfers now and they should make them a priority for the future as the future is bright.
Watson Wyatt estimates the at-retirement market will double by 2013 compared with 2007. In 2007 around 460,000 at-retirement products were sold, which will grow to almost one million by 2013. Around £13.6bn of funds matured in 2007 and that will grow to £32bn by 2012. By 2017 Watson Wyatt estimates around £50bn of funds will mature.
That points to a healthy, ongoing market for transfers and a need for advisers to seriously address the market and to ensure they are properly advising clients.
The regulatory challenge
The potential fly in the ointment of the pensions transfer market is the recent research by the FSA into pension-switching advice. It shows advisers have to focus on a wide range of issues when advising a transfer.
The FSA's Thematic Review into the quality of advice on pension switching across a sample of 500 transfer cases from 30 firms found advice was unsuitable in 16% of cases. In a quarter of firms, all cases reviewed were assessed as suitable while in another quarter, a third or more of the cases reviewed were assessed as unsuitable.
Issues identified included switches involving additional costs for clients without good reason; funds being recommended that were not suitable to clients' attitudes to risk; advisers failing to outline the need for ongoing reviews or failing to put them in place; and the switch leading to a loss of benefits from the ceding scheme without reason.
The FSA has produced a template which it will use to assess pension-switching advice and warned advisers who have failed to take note of enforcement action. The template will be used as the basis for follow-up work by the regulator which is also writing to more than 4,500 firms involved in pension switching.
The case for transfers
This is of course a matter of concern but it is important to keep a sense of perspective. The FSA is to some extent simply reiterating what it has been saying for years. There has to be a genuine reason for business to be transacted.
Not all cases are necessarily poorly advised. It is often the case that the documentation on file does not adequately back up the recommendation. Advisers need to focus on proper documentation.
It is clear that genuine reasons for business to be transacted exist. Given the current investment climate and volatility, it makes sense to transfer into other products, especially those which offer unit-linked guarantees. This is likely to be the growth area as the transfer market continues to develop.
Typically the customers who will be the target market for pension-transfer advice will be aged 45-plus and consolidating existing pension provision or 55-plus and starting to decumulate.
Those who are consolidating will want to have everything in one place so they can make more accurate and informed decisions about their pension provision while those who are starting to retire will be looking for a range of options including full or partial drawdown and phased annuity purchase or drawdown.
Unit-linked guarantees work well as a solution for those types of customers particularly in the current investment markets. They offer flexibility and the ability to stay invested in the market with its potential for growth but, of course, they come with additional charges over alternatives.
Transfer winners guaranteed
The regulatory focus on switching means advisers looking to transfer pensions need to clearly assess clients' attitudes to risk and be able to demonstrate any additional costs are justified. The advantages of the transferred product will have to be clearly shown, and in particular, how it meets the client's expressed wishes.
The additional flexibility in a product is not in itself enough to justify a switch if the client is not going to be using the facility.
The case for guarantees might seem easy to make in the current climate but it is necessary to put actual figures behind the case. Someone investing £100,000 in a guaranteed product in 1998 would have seen their fund grow to £140,785 after 10 years if they had been able to benefit from regular three-year lock-ins. The same £100,000 in a typical Cautious Managed fund would have seen the fund grow to £114,629 over the same period taking into account recent market falls
Converting this pension fund to income by using an annuity would mean an income of over £11,000 for the guaranteed product and one of a shade under £9,000 for the non-guaranteed variety - equating to an additional income of over £2,000 per year for the rest of the client's life. In these circumstances, the additional charge for the guarantee seems to be something of a side show.
Meeting the regulatory and investment challenge
The FSA's focus on pension-transfer advice has clarified the way ahead for advisers and demonstrated the need for rigorous administration and clearly outlined advice.
Advisers will be well aware of the need to fully comply with FSA regulation and indeed much of the FSA work will come as no major surprise to most IFAs. The fact that 16% of cases were wrongly advised is undeniable but it does also mean 84% were properly advised.
Advisers will also be well aware that the current investment climate is challenging. The ongoing volatility and the dramatic swings on stock markets can mean that advice which looked ideal can suddenly be made to look wrong.
When the FTSE 100 loses more than 30% in a year and base rates are cut to historic lows, hitting the returns on cash funds and annuities, it is clear that flexibility is essential while protection of capital through a guarantee is also important.
The financial opportunity for advisers in the pension-transfer market is potentially huge but the business opportunity is also there in the ability to demonstrate expertise.
