FCA – kicking the transfer can down the road


£37bn flowed out of DB schemes last year in transfers, the vast majority of the money was transferred with the help of IFAs and the vast majority of IFAs charge for transfer advice on a contingent basis. To ordinary people this means “no win- no fee” and a “win” is defined in successfully liberating money locked up in a pension so it can be spent as the transferee pleases.

The first quarter of 2018 exceeded any previous quarter with over £10bn being transferred in 3 months. This included the bulk of the £3bn + leaving the British Steel Pension Scheme.

The FCA’s own investigations have suggested to them that a high proportion of those transferring did so with questionable advice. I and many like me have suggested to the FCA that when an adviser is paid on a contingent basis, there is a clear conflict. The  “win” for a client is a “win” for an adviser- but the adviser does not face the consequences of something going wrong.

If ever there was a conflict of interest, contingent charging on pension transfers is it. And yet the FCA have ruled against banning contingent charging for reasons so convoluted that I don’t have space to list them here. Instead you can go through them following the link to Olly Smith’s excellent explanation in New Model Adviser.

By far the most potent of the arguments for contingent charging is that it enables people without the cash to pay for advice upfront , to pay for it back to front – when they have cash in their plans.  The money that comes from their transfer plan is tax-advantaged. The tax relief that this money was originally given was granted by the state so that the state was protected from impecunity in old age. Similarly, the VAT exemption on insurance advice is granted so that people can insure against old age.

But the contingent charge, which is paid from tax-advantaged money without a VAT charge is being used to liberate people from the obligation to insure themselves against old-age and is typically combined with ongoing advice on how an individual can minimise future taxes with scant regard to the very real risks that money may run out as a result of the advice going wrong.

The FCA are under an obligation to protect people from risks and for people who haven’t enough money to pay for advice, the risk is that they won’t have enough money to pay for anything at all. The rights to the state pension enjoyed by people transferring into personal pensions are not sufficient to meet the financial needs of most people in retirement. The State Pension is a safety net – it is not a mattress.


Kicking the can down the road.


It seems that all the FCA has done, has been to listen to the arguments of those advantaged by contingent charging (advisers, pension providers and fund managers).

There does not seem to have been any detailed analysis of the advice given under contingent charging or a comparison of that advice with advice given where an upfront fee is charged.

My hypothesis (which needs to be tested by the FCA) is that contingent charging introduces a bias based on the alignment of provider/fund manager and adviser interest in money being transferred. Against this the long-term interests of the tax-payer and those being advised are being disregarded. over-looked or ignored.

The FCA are guilty of a failure of nerve. Once again they have failed to take on the interests of the financial services industry. Consequently, transfers will continue to be promoted , many to the wrong people. There will be outright scamming, fractional scamming and a lot of unsuitable advice about wealth management.

Wealth is an unsuitable term for someone with a £20,000 pa prospective occupational pension. That that pension is worth up to £1m is because guaranteeing a couple an income for life from an early age with inflation protection, is a hideously expensive business.

£1m can easily equate to £50,000 in advisory fees between now and 2020. These sums may only represent 5% of the transfer (2% + 1% +1% =1%) but that’s equivalent to a lifetime pay cut of 5%.

And that 1% fee can go on being charged either as an adviser charge to the fund or as part of the AMC – where the adviser is also managing the wealth, for the rest of the client’s lifetime. Indeed – if the idea is for the pension to form part of the estate, it may be payable beyond the death of the client.

These costs are not incurred by someone drawing a pension from an occupational pension scheme. By comparison, a pensioner like me can look forward to living to a ripe old age without fear of the money running out. A pensioner like me has no need to meet to review investment and drawdown strategy, no need to consider tax consequence; we can get on with enjoying retirement.

The FCA are ignoring all this and listening to the arguments of the financial services industry. They are kicking the problem down the road, they are failing the people they should be protecting. This needs to be called out again and again and again.


Addendum – LCP’s new research (Courtesy of Jo Cumbo and the FT)

Savers in their fifties trading “gold-plated” retirement benefits for cash lump sums are typically being offered half the value of their pension by their scheme, according to new analysis of the booming transfer market.

From 2015, around £20bn-£30bn a year has flowed out of company “defined benefit” plans as 100,000 members annually have accepted cash lump sums to transfer their future pension rights out of their scheme.

Fresh insight into the value of the transfer deals came after new regulations came into effect this month requiring advisers to compile bar charts showing clients how the cash lump sum offered by their pension scheme compared with the estimated cash value of the benefits they are giving up, known as the transfer value comparator or TVC.

LCP, the actuarial consultancy, used this new formula to examine transfer values — the amount offered by a pension scheme to a member to trade a future income stream into a cash lump sum — offered by 200 pension schemes ranging from £100m to £10bn in assets and covering millions of members across all industries. It found that average transfer values made to members at least 10 years from their scheme pension age, were around 57 per cent of “full value” — far less than older savers, who typically got around 73 per cent of full value a year before retirement.

“If this group of clients [in their fifties] is told that they are only being offered half the value of their pension, then this is likely, at the very least, to prompt searing questions as to why there is such a discrepancy,” said the LCP report, which was prepared with Royal London, the mutual pension provider.

Regulators say most pension members would be better off keeping DB pensions, which pay a secure, inflation-proofed income for life, and provide an income to surviving spouses.But historically high transfer offers, and greater freedom to spend retirement cash outside of a DB pension since 2015, have tempted many to transfer to a more flexible pension arrangement.

LCP’s analysis said the transfer values made by schemes varied widely, with some below 40 per cent of full value and others greater than 90 per cent. The report found that this was due to varying investment strategies and different assumptions used by scheme actuaries to calculate transfer values.

Jonathan Camfield, partner with LCP, said the analysis “did not necessarily mean that transferring was a bad idea. But it does show very clearly that those who transfer out are foregoing a great deal of certainty about their future retirement income and that this certainty is of considerable value.”

The Pensions Regulator, which supervises DB schemes, said: “Our primary concern is that DB scheme members requesting a cash equivalent transfer value (CETV) have all the information they need to make an informed decision.“Transfers from defined benefit schemes to defined contribution schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.”

The Financial Conduct Authority believes the new rules for advisers will help members better understand the deals they are offered, compared with the old system, which focused on investment returns needed from the transferred funds to match what they might have got by keeping their DB pension.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to FCA – kicking the transfer can down the road

  1. John Hutton-Attenborough says:

    Hi Henry, DB transfers are not the exclusive preserve of IFAs and my understanding is that many who do advise in this arena do so on the basis of charging a fee for the advice irrespective of whether the transfer proceeds or not. I know your experience with BSPS may have affected your opinion of the adviser community/ profession but there are some really professional firms/ advisers out there totally committed to advising clients properly and diligently to ensure that the right outcomes are achieved for all. Contingent charging should be banned without doubt and certainly in regard to DB transfers. One huge FS business however dictates this space and until we have a clear understanding as to why the regulator is comfortable with their charging proposition it is difficult to believe that it will ever change. Perhaps you have a view on this too?

  2. Stuart Fowler says:

    The second part of your piece deals with the difference between a transfer value and the new TVC , quoting Jo Cumbo. This points to a possible misunderstanding of the source of the utility gain from transferring. It won’t necessarily change your or her observation but it can help clarify why differences are arising and what it implies for advice.
    For the difference to arise that J quotes there has to be a difference between the asset allocation of the scheme and the risk free allocation assumed by the TVC calculation. The TVC calculation will only show a much higher value than the CETV if the assets held by the scheme are not also risk free. That is because the CETV will have made an assumption of a higher expected return than is provided by ILGs. Obviously what’s going unsaid in these cases is the difference in the level of confidence. The CETV assumptions where a scheme has not derisked are much lower – perhaps only 50% if relying on mean or normalised equity returns – than the rather rough and ready TVC calculation which might nonetheless be above say 98%.
    In these cases where a scheme has not derisked the chance of exceeding the assumed scheme returns can only ever be greater if the member would be willing to take even more risk than the scheme is already taking. This is unlikely but not impossible. It’s the main reason transfers have increased under the prescribed rules, more important even than low interest rates.
    The dependency in most cases of any utility gain on this difference in risk tolerance between scheme and member, captured approximately by asset allocation differences, is a good example of how numerical calculations could be used in triage. Unfortunately the FCA has reached a perverse conclusion about triage, thereby wasting the potential of objective calculations like the TVC.
    The fact that the FCA actually got the TVC proposals wrong suggests it has not fully grasped the role of calculations in improving advice as well as access to advice.

    • DC says:

      Well said Stuart.

      They have replaced a cumulative annual discount rate (critical yield A) with a capital comparison which compares the CETV ‘as is’ to the capital sum you would require to purchase the same benefits if they only grew at the ‘risk free’ rate.

      The assumption being (presumably) that the client is taking ‘no risk’ (!) being invested in a DB scheme and therefore the comparison is reasonable.

      You then have to ask a client to accept this as fact despite the glaringly obvious flaws in the logic.

      It seems to me that FRS17 has given then financial hangover from hell. On one hand it sought to ensure more transparency in company valuations (which is extremely contentious) but on the other hand it has started a snowball of unintended consequences where the measure of liquidity is (effectively) what proportion of ongoing liabilities could be paid with income derived from gilts.

      Its such an utterly absurd notion.

      The true measure of meeting liabilities should be met from a diverse portfolio, which would contain exposure to gilts/securities anyway.

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