Well done Andy Briggs for saying what a responsible life company CEO should say .
Let’s be clear Aviva are not calling for a ban on defined benefit transfers, they are saying that the practice of contingent charging- must stop.
What contingent charging does.
Contingent charging allows an adviser to charge for advice out of the proceeds of the transfer. If the transfer does not go ahead, the charge cannot be levied. The adviser can still charge a fee if the advice is “don’t transfer” but his/her recovery rate on such invoices is likely to be low – most people use IFAs to transfer and aren’t prepare to fork out to be told to stay put.
The impact of contingent charging
So contingent charging comes with an in-built bias. The ONS statistics show that since contingent charging caught on (really from 2014) the transfer of money out of DB schemes has risen seven fold; since in became the norm (from 2016) transfers have increased three fold in a year.
Since the 2017 number is three times the amount of organised buy-out/buy-in and transfers, you’d imagine the Pensions Regulator would have some pretty good Management Information about the scale of the transfers. They are in fact making a material difference to the solvency of schemes it is regulating.
But this does not appear to be the case. The Pensions Regulator reckon that 100,000 people took DB transfers last year but that only £14.3bn was transferred. A gilt-plus discount rate now produces a multiplier of 40x. Most schemes use this discount rate, most schemes use a 40x multiplier on CETVs.
Simple maths tells you that the tPR’s estimate of an average CETV is £143,000- using a 40x multiplier , that makes the average pension foregone around £3,500pa.
The average transfer value for BSPS was around £400,000, Barclays and Lloyds report £500,000. Most IFAs will not touch CETVs less than £300,000 (for reasons I will explain in a moment). Where are all these small transfers?
Barclays alone reported £4.2bn transferred out of its staff scheme, LBG £3bn, BSPS £3bn. These three schemes alone transferred out over £10bn last year. I think the average CETV paid last year was c£400,000 and that means that both the numbers of ONS (slightly) and the Pension Regulator (massively) should be revised upwards.
The ONS £34.2bn is provisional, I suspect that the true number is north of £40bn.
The ONS confirmed number for 2016 was £12.8bn and if we continue to see the trajectory of transfers, demonstrated by the table above, we could lose over £100bn this year.
Thankfully this is unlikely to happen, but no thanks to the regulators and their dodgy sums.
What will put the lid on transfers?
There is only one way to stop transfer activity and that is to stop insuring the advice. Transfer advice is insured by Professional Indemnity teams and reinsured around the world. Lloyds of London is the primary centre for spreading the risk. The word I get from the insurance markets is that the game is up and that insurers have quite enough risk on their hands from last year’s bonanza, to be going on with.
They are insisting on quotas for the numbers of transfers (meaning IFAs get more picky and push average transfers higher still (my £400k estimate already accounts for some quota pressure).
Many IFAs are finding they can’t get transfer advice insurance at all.
The FCA may be able to put a heavy hand on the lid – by banning contingent charging- but I suspect that by the time they do, the PI insurers will have done that for them.
DB pension managers are already seeing a slow-down in transfers.
Andy Briggs is not just honest , he’s smart. By coming out now, he is adopting a position that won’t hurt his business in terms of revenues (the party’s nearly over) and it can only put him on the right side or the regulatory argument.
Even if we take this slightly cynical view, Andy Briggs is still doing the right thing. The hapless Adrian Grace of Aegon, once again shows he has neither the moral backbone or the commercial nouse to be running a life company. Here he Grace in the FT
“Advisers and their clients should have a range of options for paying for advice,”
“Surely between the regulator and the industry with its compliance departments and pension transfer specialists we can find ways of managing conflicts of interest. Failing to do so will inevitably widen the advice gap when we should be doing whatever we can to reduce it”.
Insurers have been part of the bonanza, they have sat for the past five years with their aprons held in front of them , while CETVs have poured in. They have paid advisor fees from the SIPPs and personal pensions they offer and have given advisers the right to take annual income from these products through their DFMs. The result has been a massive hike in advisory fees and no great fall in the cost of platforms and fund management. Witness these recent numbers published by Citywire.
Meanwhile , these same insurers are offering pretty well the same products as workplace pensions, without advisory fees and at massively discounted platform and fund management fees. Most Aegon and Aviva workplace pensions have charges around 0.50%, 1/4 the cost of the average SIPP.
Why not use the cheaper alternative ?
The answer can be found in one of the comments on the FT piece quoted above. This from “Matt”
We are a very cautious, very ethical, IFA firm offering contingent advice on DB transfers. We advise against a transfer in 90% of cases (and that is 90% of cases that get past the initial sense-check screen), and we do not proceed to arrange a transfer that we advise against. We have given most of our business to Aviva up until now, but I guess they don’t want any more of it, so we will use AJ Bell or Alliance Trust for our clients from now on
The simple answer is that it hasn’t crossed Matt’s mind to recommend a product that he cannot derive an income from. I would bet a very large amount that Matt is now referring to the Aviva workplace pension – but to the Aviva SIPP (with the full “suite” of adviser charging options).
Both Adrian Grace and Matt are in the same boat. They both support contingent charging, they both promote products that pay advisers upfront and regular fees and they both ignore the fact that there are legitimate, cheaper product on their shelves that are not considered.
Andy Briggs – a straight man in a “bent” market.
I know I should use a word like “asymmetric”, but I’ll use “bent” instead – as it’s one that ordinary people will understand.
The advice market is bent by contingent charging and the provider market is bent by providers bending over to support IFAs distribute their products.
Aviva have called time on this and thank goodness there is some support for good IFAs who don’t use contingent charging.
Hopefully, this will help the FCA see the problem of contingent charging for what it is, a bending of advice and product to the benefit of financial services and to the long-term detriment of people in defined benefit pension schemes.
In all this, Andy Briggs is showing himself (albeit late in the day) to be “straight”. For which we have to thank him. He deserves my apologies for misspelling him Biggs (Andy Briggs is innocent ok?)
He won’t be thanked by IFAs like Matt and he won’t be friends with Adrian Grace and others – down at the ABI, but he’s done the right thing.
I am not a mathematician and I may be wrong on those numbers, anyone who wants to challenge my thinking (especially at tPR) please do so – either in the comments box or directly to me at firstname.lastname@example.org .