Josephine

Boulding

Jo Cumbo’s article in Pensions Expert on contingent charging takes a dim view of trustee behaviour to date.

Her idea that advice to stay in a DB scheme could be paid for by docking the original pension has got some support, importantly from Sir Steve Webb

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

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Certainly trustees haven’t been involving themselves in offering guidance, though that could change.

Adrian Boulding’s suggestion – posted on my “planning permission” blog is as follows

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.

The only bit of that , that I’d disagree with is that this kind of triage should cost hundreds of pounds. The key inputs can include a “why are you interested in transferring with a “tick one box” capture, including five or six reasons such as

1. I don’t think I’ll live long enough to enjoy my pension
2. I need cash now to pay my debts
3. I think I can invest my transfer to give me more in retirement
4. I want the flexibility to spend my money how I like
5. I’ve been told to look at a transfer by someone.
6. I’d rather have the money in my bank than in a pension

 1 and 2 ;- the needy

A few questions as to the motivation of the person making the inquiry would quickly establish where this person should go. There are some very obvious danger signs, people trying to draw cash out of pensions before 55 should certainly flash a red light. Tax-free-cash can of course be used to pay off debt but anyone thinking of mortgaging their retirement needs debt-counselling and fast. A responsible pre-advice service can sign-post the free debt counselling availably locally through citizens advice and centrally through the Money Advice Service (now part of the Single Financial Guidance Body).

Where the motivation is driven by the inquirer’s concerns over their health, it’s a different matter. Many people do not realise that were they to die before drawing their pension or as a pensioner , someone else can be nominated to receive a residual pension as a dependent. Obviously a lot of this comes down to definitions but this is an opportunity for trustees to properly promote the scheme’s capabilities before the inquirer is referred to a financial adviser. Defined benefit schemes employ administrators who’s job it is to explain these things and if the administrators can’t do that job, it may be time for the trustees to reconsider them. Trustees can and should back their administration teams to explain scheme rules.

These two categories of inquiry are “needy” and they both point to what the FCA call “vulnerability”. These kind of questions are best dealt with by people who know what they are talking about but they do not generally need financial advice. In an extreme situation, it may be that the inquirer needs medical help, the duty of care to members does not preclude referring the inquirer to a medical service.

3 and 4; the greedy

There are some confident people who believe they can do a better job with the monies allocated to pay a defined benefit than the trustees. These are the people who should be taking financial advice and they may well be those who least want to pay for it. These are precisely the people who are being failed by contingent charging.

I appreciate that many readers will consider me paternalistic or even patronising , but the reason we have trustees is to protect some people from themselves. It’s not just in Port Talbot that contingent charging unlocked the money, hundreds of thousands of people are now sitting on pension wealth unlocked from defined benefit pension schemes – with the money either sitting in cash or in equities and very much at risk of not providing an income for life with any kind of inflation protection.

I also appreciate that for many of those people, replicating the defined benefit income stream was not the point of the transfer and I can accept that some people will be quite comfortable with the depletion of their transfer value by the fall in world markets and the scant interest available to them in 2018.

But I am quite sure that a very large number of the people who transferred out considered the charges levied on their pot by the adviser, the price they paid to get their money, rather than the cost of financial advice. These are the people who we should worry about, for they are the people who consider the payment of advisory fees a kind of insurance policy against which they can claim if things go wrong.

And if things continue to go wrong with their pension policies – or worse still if they have by now transferred the money from their personal pensions into their bank accounts, then the fall in pot value and/or the tax bills on claims, may be the basis of claims to come.

The FT run another story today about the costs of drawing down cash – showing it is hard to have your money managed in an advised way for less than 2% pa.

It is hard to see how a  drawdown strategy costing 2% pa can deliver value for that money in a low-interest, low-return economic environment. Yet this is precisely what many of the personal pensions set up under contingent charging are costing and – even if markets do pick up – the cashflow projections which underpinned many of the transfer approvals I have read, have little or no chance of being met.

If the reason for transfer is that someone is backing themselves to beat the trustees, then that person should be testing that with a financial advisor and paying up front for that advice. The argument that contingent charging is more tax-effecient and maintains liquidity for the client are pure sophistry. If someone is so good with money that they can manage their pension themselves, they should have plenty of liquidity and should know that VAT is charged on professional services. IFAs who think they can avoid charging VAT by charging advice to their fund clearly do not believe they are offering a professional service.

5 and 6; the numpties

There are some people who are neither needy or greedy, they are just financial numpties. These people should not be taking financial advice, they should be taking their pension.

People who take transfer values and then cash in their pensions so they can have money in their bank accounts are numpties.

People who get persuaded to take transfers by financial advisers or friends or family are behaving like numpties. They are generally following the crowd, they are not thinking for themselves – they are neither needy or greedy – they are just being stupid.

I could have told many of the people I met in Port Talbot they were behaving like numpties and in fact Al and I did – when we heard some of the reasons given for transferring – including the arguments that they didn’t want their money with TATA, we told people straight not to be so stupid.

These people did not need to have a financial adviser do cashflow planning for them, they needed to transfer into new BSPS or occasssionally take a reduced pension from the PPF.

To be fair to the Trustees of BSPS, they had set up help for these people, but it was like building the Maginot line- the defences were in the wrong place.

Any pre-advice service needs to identify financial muppets and tell them to leave well alone.

We try to be too tender – people need telling

Amidst all the hand-wringing of the past 12 months, I have heard very little straight talking about transfers.

Hopefully you have read some straight talking on this blog and if you don’t agree with me, you can straight talk to that effect in the comments box.

I don’t agree with Phil Young who blames the transfer debacle on freedom and choice,  

I don’t agree with Quilter and SJP that contingent charging should remain to broaden the range of people who can get advice.

If there was a policy mistake, it was from the Fowler review in 1987 which allowed transfers out of DB plans in the first place. As for vertically-integrated provider arguments about financial inclusion, some of the people who are targeted for DB transfers would never have passed their IFA’s sniff-test, had they not had a big fat CETV.

These are bogus arguments that perpetuate the misery that is being occasioned by transfers out of DB schemes using contingently charged advice.

The pensions given up by steelworkers and many others were designed to provide them with a wage in retirement and a residual spouse’s pension. They also gave people the option of tax-free cash. They were entirely suitable for most people’s later life needs and they have been swapped for wealth management schemes about which most of these “new to advice”, contingently charged people – have no idea.

The people who need telling this are the FCA and TPR who are supposed to regulate advisers and trustees respectively. I tried to tell the Trustees and Advisers of BSPS but they didn’t listen. I am still trying to tell it straight

Contingently charged advice is little more than commission and should be banned immediately.