It takes 10 times longer to transfer a pension in-specie than it does for a Stocks and Shares ISA. And the impact on customers will increase as the effects of pension freedoms play out.
Altus has undertaken research with leading SIPP providers to better understand how well customers are served by current pension transfer arrangements. The results show that, on average, in-specie pension transfers (involving nothing more complicated than UK funds and equities) are taking between 6 and 18 weeks to complete. Compare this with the typical in-specie ISA transfer time of less than 5 days.
The considerable out of market risk incurred by transferring pensions as cash seems to be considered a lesser evil than waiting many months for an in-specie transfer. Advisers are not encouraging customers to transfer in-specie and take-up is still relatively low.
The primary reason for this stark difference between pensions and ISAs is that most ISA transfers are conducted electronically using the TISA open standards transfer framework whereas in-specie pension transfers are carried out on paper forms, despite the fact that the TISA framework also supports pensions.
There are undoubtedly some aspects of pension administration that are more complex than ISAs, but there is no good reason for in-specie transfers of portfolios of simple assets to take significantly longer for pensions than ISAs. This was the conclusion of the TISA cross-industry working group when it set an SLA for pension transfers broadly similar to that for ISAs.
In-specie pension transfers doesn’t currently seem to be a priority for the FCA. As part of the RDR, the FCA mandated that platforms must allow customers to transfer assets in-specie to other providers but the focus has been on ISAs and unwrapped assets and, for the most part, pensions have been ignored. The FCA’s pension transfer research exercise concentrated only on cash transfers.
As a result of pension freedoms, the pension landscape will look very different in the years to come. Many more people will manage a portfolio of pension investments long into their retirement rather than simply taking an annuity and it is likely that the assets in pensions belonging to retired people will soon outweigh the assets belonging to working people. The key prize for many pension providers will be a share of that retired pension market and they will strive to offer a compelling service at a competitive price.
But customers will be reluctant to transfer their assets if they must choose between a cash transfer with a short (but potentially catastrophic) period out of the market and an in-specie transfer with a long period with no control over their investment portfolio. And if customers are reluctant to transfer their pension then the competition between providers will be less effective.
Sooner or later the FCA and the industry must surely rise to the challenge of in-specie pension transfers and ensure that pension customers enjoy the same level of service as ISA customers.