How to give overseas DB members the correct advice in transfer exercises

With transfers from defined benefit pension schemes at an unprecedented high, the reduction of inherent scheme liabilities and risk is an undoubted advantage to companies, scheme trustees and managers. There is a shared industry view that commitment to effective communication and expert financial advice can best protect such risk-reduction projects to safeguard a sponsor's reputation. In fact, an obligation to provide equal and fair support has been in place since 2012 by the Department for Work and Pension's (DWP) Code of Good Practice. The code was brought in to ensure industry best practice for 'incentivised' transfer exercises in respect of any advice provided, and the associated systems and processes.

Overseas, overlooked

However, a small yet significant population of current or future overseas members are consistently ignored, supporting the phrase 'overseas, overlooked'. In consideration of an ever-increasing global mobility, as more individuals spend part or most of their working life in different jurisdictions, more attention should be paid to this population. They find themselves increasingly vulnerable to unscrupulous, unregulated advice and pension scammers.

Trustees and sponsoring employees are increasingly finding themselves between a rock and a hard place when it comes to running incentivised transfer offers for overseas members. The 'rock' being that, if overseas members are excluded, the sponsor and trustees could be criticised for failing to treat all members fairly. The 'hard' place is that UK advisers who are geared to support these enhanced transfer value and flexible retirement offer exercises rarely hold the fundamental knowledge, expertise or experience required to adequately provide recommendations amongst the complexities and potential tax implications for current or future non-domiciled members.

Excluding an overseas member from an offer can very easily subject a project to criticism. It may well be in a member's best interest to transfer benefits to the jurisdiction they are currently in. This is a particularly relevant factor of the advice process with the majority of overseas members inclined to have pension incomes paid in local currencies.

For UK-based advisers, the complexities of advising an overseas member are plentiful. Should an adviser not take an individual's current tax situation into account, the adviser will be likely subjected to regulatory scrutiny. In the UK, for example, the general overview of the tax system is EET - Exempt, Exempt, Taxed. In comparison, the system is TTE - Taxed, Taxed, Exempt in several other jurisdictions. For US citizens, the situation is even more complex with their obligation to pay tax based upon citizenship and a requirement to complete annual returns incorporating pension accumulations. As mentioned, the DWP's Code of Good Practice clearly outlines advice should be "tailored to the individual and their circumstances as a whole, including, consideration of all materially relevant factors known after reasonable enquiries".

Complexities

Delivering proper, specialist advice to overseas members is undoubtedly complex given circumstances will never be as straightforward as when delivering advice to UK-based members, which is complicated enough. Where UK advisers must consider attitude to risk, need for a steady and rising income, other assets, tax implications, social benefits, expected longevity and UK inflation, an adviser with any cross-border interests, must also consider country-specific tax regulations, contribution limits, permissible assets, the impact of means-tested benefits and how funds can be accessed.

In practice, we have witnessed overseas members encouraged to seek advice in the jurisdiction they are located. Time and time again, this approach creates uncharted waters for individuals as they attempt to source advisers in their new country of residence. Poor member outcomes are likely as individuals may be actively targeted by unscrupulous advisers in potentially unregulated jurisdictions. The anecdotal evidence of catastrophic outcomes is as a result of benefits being transferred to illiquid assets in products with more charges than a wounded buffalo all too frequent.

Conjoined approach

The wider adviser community must adhere to a conjoined approach, underpinned by ethics and good practice, to ensure projects are aligned with regulated firms in the UK with relevant passports and permissions to advise overseas members. Such firms operate in a specialist, niche market space and will have a very different operating model to other mainstream UK adviser. They can, however, add monumental value in closing the advice gap and ensuring good member outcomes.

Sponsors can either engage one advisory firm for any UK members and another for any overseas members, or, engage a UK-based firm with overseas adviser introductory agreements already in place. Adapting current business models to incorporate cross-border support for such members may require a review of existing company processes, staff training and a consideration that project timelines will need to be managed accordingly. Advice and implementation fee structures should also be reviewed. With proper consideration and communication, these can be very easily shared with absolute transparency to the member so the value of closing the advice gap will ensure everyone gets a better night's sleep.

Jonathon Webb is a consultant at Montfort Consult

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• Topics
• Defined Benefit
• Employee Benefits
• defined benefit
• pension scheme
• tax
• pension
• Jonathon Webb
• advisor
• overseas advisor
• consultant
• Montfort Consult