DB scheme opt-out advice

Hi all

I'm looking for some help please. Adviser is, rightly in my opinion, recommending a client opts out from active service within a DB scheme. This client cannot achieve his objectives unless he transfers these benefits and draws on them early, which can only happen if he opts out first. Other salient points:

  • He intends to remain in employment with the sponsoring employer and has been told he would be eligible to join the DC scheme with a nice employer contribution of 12% if he opts out of the DB scheme and would be able to transfer his DB benefits as soon as he becomes a deferred member.
  • He's got 3 years to go until the DB scheme NRD.
  • He'd not lose death in service benefits by opting out
  • The scheme have only given an indicative CETV - they'll only give a guaranteed one when he's finished service in the DB scheme.

The issue isn't with the advice (the cash flows are compelling). The issue is the adviser's compliance department will not give any judgement on whether the opt out recommendation is suitable unless they can see an actuarial report that quantifies the value of benefits given up, although they have not indicated specifically what that means. The compliance department acknowledges that if the client was a deferred member, the advice to transfer would be solid and they agree that the cash flow analysis the adviser has done 'stacks up'. But as he's an active member they have their red flags out all over the place.

The adviser has attempted to quantify this himself by running a TVC assuming that pension at dol (now) is augmented by the estimated future accrual he'd be giving up by opting out. It's a bit of a fudge, but it does go some way to trying to illustrate the value of the benefits given up and the additional work that the current estimated CETV would need to do to give him equivalent benefits. Compliance department didn't like that one bit, however.

The adviser has approached an actuary who has worked on things like this in the past, only to be told he wouldn't be willing to put his name to it given the risks involved.

So, we're a bit stuck. We could estimate, based on some assumptions, what pension he'd lose. We could also estimate what pension could be secured from DC scheme. Those parts are easy. It's the quantifying the value that the lost DB accrual would represent that's the issue here. The only way that I can think of doing it is using a TVC annuity rate, work out what fund is required at NRA to secure the 'lost' pension (allowing for the pension that could be secured from the DC membership) and discounting back. Does that sound reasonable?

Has anyone got experience of similar?


Outsourced paraplanner for The Paraplanners.  President of the Scottish Petanque Association


  • I think you need to encourage a pragmatic approach with the compliance team on this.

    You are being asked to quantify the value of something that the client isn't going to have. In reality, the advice to opt out, or not, will be judged on its ability to meet the client's objectives. Any benefits foregone from opting out are immaterial to the outcome, unless it has the potential to genuinely alter the client's objectives such that it becomes suitable to recommend that he remains in the scheme.

    Therefore, if it isn't possible to conclude that a recommendation to remain in the scheme is suitable, then the opt out is suitable by default as the only remaining option. "once you eliminate the impossible...etc etc"

    If you cannot convince the compliance team of this, then the adviser will have to decline to advise. Within the firm's existing compliance framework, the client cannot be advised to opt out and transfer, nor remain in the scheme, as neither can be shown to be in the client's best interests.

    The compliance team has constructed a framework in which it gives the illusion that an opt-out can be recommended, rather than simply state that it isn't prepared to advise active DB scheme members.
    Depending on the commercial value of the case, and the structure of the firm, I'd expect there to be the ability for a senior manager to take a challenge to the CF10 on this, because it seems to me like the need to tick a box is overriding common sense.

    Benjamin Fabi FPFS
    Chartered Financial Planner

  • So, it's now clear that we have an issue with the compliance team. Calculation of loss of benefits from opting out is, by their own admission, outwith their training and expertise. Therefore they cannot verify that any calculations or assumptions are reasonable. They will only accept calculations by an actuary, I presume because the network will not take responsibility if the calculations are wrong.

    So it's chicken and egg - network want an actuary to take on the liability but actuary is refusing. As you say, we're now in the situation where the adviser is unable to demonstrate to his compliance dept that any course of action is right for the client. The adviser is tearing his hair out.

    Outsourced paraplanner for The Paraplanners.  President of the Scottish Petanque Association
  • "Calculation of loss of benefits from opting out is, by their own admission, outwith their training and expertise."

    Two outcomes then

    • they need to trust the expertise of the PTS, accepting that there is no market for independent calculation of what they want.
    • they need to tell the PTS that he cannot give advice to this client.

    If the latter, it needs to be in sufficient time that the client can go elsewhere within the guarantee period of the CETV.

    Benjamin Fabi FPFS
    Chartered Financial Planner

  • Do they mean that massive report from O&M you have to pay for would be more convincing that tinkering on Select a Pension yourselves? Is it that the network have a relationship with Select a Pension so can't name a competitor but BBC style heavily hint that other analysis tools are available?

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