Jo Cumbo
In an important contribution to the debate on how members of DB plans can pay for advice on whether to transfer out, the FT’s Jo Cumbo calls for the financial advice bill – regardless of whether the answer is “yes” or “no”, to be paid by the DB scheme.
The suggestion is very helpful; this practice is already in place for individuals to pay tax bills arising from stealth taxes on pension accrual where individuals inadvertently breach annual allowances. Schemes are getting used to docking pensions for divorce settlements and the administrative processes needed to administer the advice payments are already in place.
Royal London’s Steve Webb has now come in alongside this suggestion.
Indeed – but if contingent charging was banned we’ve also suggested in our submission that the impact could be mitigated by allowing advice costs to be debited against DB rights, in line with your column this week in @pensions_expert https://t.co/f2uDMAXR3o
— Steve Webb (@stevewebb1) February 7, 2019
This is a rare example in pensions of a news reporter making the news!
The ironies of over-information
Most of the time, prospective pensioners walk into life-changing financial decisions surrounding their defined benefit pension schemes with little or no knowledge of the decisions they are taking. An example being the taking of tax-free cash, which is now so much the default that actuaries assume it will happen in scheme funding calculations.
Many schemes are offering commutation factors that can only be justified by the tax-free outcomes, means that schemes are getting away with poor exchange rates between cash and pension – because people don’t know the questions to ask.
So it’s ironic that the conversion factors surrounding a CETV are accorded so much scrutiny that such a cumbersome vehicle as scheme pays – is actively considered.
The reason it is, is that large parts of the DB pension system are now so fragile that they risk being eroded and falling like cliffs into DC. It needs to be pointed out that there appear to be no losers in such erosion, the advisers are making money, providers are making money and pension schemes are clearing swathes of risk from corporate balance sheets. As with most “win-win-wins”, the dictum we should be reminding ourselves of is..
“If it looks too good to be true – is probably is”.
Case study – me!
When I was 55 , I looked at taking my defined benefit as a transfer to a DC scheme. I was allowed a free transfer quote, prepared at some expense to the scheme by scheme actuaries and administrators. I looked at my CETV and was able to assess whether I would be getting value for the money on offer. I gave myself advice (which I was entitled to) and did not take the money. It wasn’t hard to see that there was a good case at the time for taking the transfer , but I didn’t.
- I didn’t trust myself to manage the money successfully
- I didn’t trust anyone else!
- I didn’t want to be worrying about the markets and the impact on my pension
- I had confidence that as a pensioner, I would get my pension paid as long as I was on the planet – and that my partner would get a residual pension too.
Because I did not pay to come to these conclusions , I saved myself around £10,000 (+vat) in advisory fees or a nasty litigious time with an IFA – if I had turned down a recommendation to transfer on a contingent charge.
I will of course have to live with my decision to get paid a pension rather than take cash, but I am sanguine about that.
If I had taken advice and had a £10,000 charge against my pension, I would have around £25 pm docked from my pension (increasing by RPI each year) for maybe 50 years.
The consequences of eroding pensions by fractional deductions through scheme pays are every bit as serious to my long-term finances as the payment up front. I imagine that in a scheme pays, the VAT I paid would be un-recoverable ( 20% of the £10,000 I was quoted).
The danger of scheme pays
The numbers above are sobering. £10,000 paid to an adviser from a scheme or from the client’s bank account is still £10,000 and that £25 pm is the equivalent of £10,000 whichever way you cut the cake.
It is effectively paying for advice on the never-never – a kind of Hire Purchase agreement of which PPI is the latest incarnation.
The danger of this approach is that it is presented to clients as so painless as to be a “no-brainer”.
“what’s the worst that can happen, I say “no” and you’re out a fiver a week?”
If a fiver a week’s the downside and the upside is half a million pounds of accessible capital, the temptation to take unnecessary advice is obvious.
Unnecessary financial advice
I don’t think you’ll find the phrase “unnecessary financial advice” in the FCA’s COBS rulebook, you certainly won’t see it as a risk in any advisory literature. The received wisdom is that regulated financial advice is necessary.
But in my case study, I firmly believe that I did not need advice about taking my transfer, all the decision points listed above were decided upon by my emotional response to the prospect of having to manage my own money.
Most people, when presented with the stark reality that now faces people who’ve transferred, is that they would have been better off in their schemes being paid a scheme pension for the rest of their days.
They didn’t need to be charged thousands of pounds to be told that. So for most people, the scheme pays route is a total red-herring and good advisers will not lead people down that route.
The danger is that less good advisers will find the each way bet of being paid by the scheme or out of the transfer value, a bet they cannot lose. The poor adviser will be able to lean on the victimless charge argument to provide unnecessary financial advice – as damaging an insurance policy as PPI – and equally useless.
Scheme pays requires full disclosure
If we are to have a non-contingent charge transfer advisory payment based on scheme pays, it must be made crystal clear by the trustees that they will be sending the client’s adviser an amount in pounds shillings and pence terms. Trustees must also make it clear that the deduction from someone’s pension as a result of this is likely to cost the member that same amount – in today’s terms and is simply the same bill expressed another way.
Advisers who work on such a system would need to be equally clear about the impact of scheme pays.
I remain to be convinced that a system of scheme pays would stop unnecessary advice. I think we need more, applying for a transfer should be like applying for planning permission on a house.
Planning permission
I stick with previous comments in precious blogs; that this kind of advice – advice that is paid for on the never-never, should only be entered into where there is a clear reason why a prospective client might be better off not taking the scheme pension.
My argument is that the onus should be on the adviser to prove that there is a case for the client to be asking the question about transferring in the first place.
Taking a planning decision like this should be as serious a decision as applying for planning permission on a house
The submission of that case for clearance – should be something that should be carefully considered by the adviser. It should not be a cost-free process. As with a house- planning application – it should be submitted with the risk of failure being obvious upfront.
The advisory diagnosis may not always be what was hoped for,
I can see a case for a “pre-advice” service, costing not thousands of pounds but hundreds of pounds, that would provide an indicator as to whether full advice is likely to say either yes or no. It would just need an algorithm asking key inputs like your age and wage…….Maybe scheme trustees could offer this service.
Adrian
Adrian, new regulations introduced wef January this year make this impossible. An advisor cannot give an indication prior to the presentation of advice whether or not a client should transfer. Theoretically this of course means a client would need to complete a full advice round which I would typically mean they would be expected to pay.
Henry, what you did was effectively ‘triage’ yourself out of transfer (if that makes any sense). Clients can of course still do this as no advisor worth their salt would drag a client kicking and screaming down the path of transfer.
I’m not sure when you were making your decision Henry but you didn’t always have to seek advice to transfer (as you are probably aware).
The fact is that now you do (although there are very rare exceptions to how this works in practice) and this was introduced by legislation. I’m actually not sure what the background to this legislative change was, usually there is a build up of momentum around some key point or other.
If you strongly feel that advice on complex retirement options is something the ‘average Joe’ can comprehend without taking advice you would need to instigate some change to the existing legislation because otherwise there will be no change. Presumably legislators didn’t think that was the case and that is why the legislation was introduced(?).
Frankly many enquiries we get are “What do I need to do to transfer?” and every time this happens I am actually glad that people can’t just push the button. I am of the opinion (based on 10 years experience with a compliance-first company) that there would be far more people transferred out if they were able to self-transact.
Whether or not this would be detrimental to them in the long-term, who knows? From reading your blog for over two years you clearly seem to think it would be ruinous for most so it would be interesting to find out your thoughts on the impact of removing the advice requirement. Unintended consequences perhaps?
On the topic presented, ‘scheme pays’ is one of the worst ideas I have ever heard. Anyone who thinks this through for even a second still think it’s a good idea is either naïve in the extreme or an idiot.
Hi Henry, thanks for sharing.
The bit I find most instructive is where you give your four reasons for sticking with you DB pension. Of which not a single one was ‘value for money’. Having worked in pensions for many years you were in position to make such a call but did not.
For me that highlights a key point. Transfers aren’t really about numbers in a spreadsheet. Sure, some CETVs might be a ‘bite your hand off’ deal, others a stinking wet fish. But most will be somewhere in between. It then comes down to emotional and physiological factors.
This leaves a big question. Are financial advisers the best placed people to help with evaluating those factors? Unfortunately, in my view, the FCA are less concerned about the why people elect to make transfers than the how. I wager that when it comes down to it, most people’s ‘why’ will look a lot like yours: decisions based on temprement and personal experience rather than ‘the spreadsheet said so’.
It’s for that reason we should be wary of contingent charging. Because transfer decisions turn on the unquantifiable. And given that, how can a customer be sure that an adviser hasn’t subtly nudged them towards the ‘why’ that lands the adviser a pay day. (not that I think any adviser worth their salt would ever do that – but how is a lay person to know?)
With regards to the four reasons for sticking with the DB pension, Henry has certainly highlighted the value for money he is getting from it which is:
1.The DB pension is trustworthy.
2.The DB pension manages the money successfully.
3.There is no worrying about the markets and the impact on the DB pension.
4. As a pensioner, the DB pension is paid for life and his partner would get a residual pension too.
Also, through these conclusions, around £10,000 (+vat) was saved in advisory fees.
All these facts should have a good impact on his well-being prior to and throughout retirement.
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