£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.
