Two unexpected things happened yesterday; SJP’s candidate for the “fireside chat” with the FCA – went sick (with no replacement offered) and the FCA published their market- wide data results for defined benefit transfers.
Together this meant my fireside chat with Debbie Gupta turned into a tete a tete and a very illuminating one at that. That was because Debbie Gupta is a straight talking person who answers the questions put to her and says it like it is. She is constrained in what she can say (which is why we did not talk about Woodford, or ACDs or the failings of individual SIPPs , but she was prepared to talk about the data results and she did promise that they would prompt action by the FCA.
There are many, including me, who reckon that you don’t have to wait two years to decide whether there is evidence enough to consider DB transfers a problem.
Next year the FCA plans to hold a “series of events” to raise standards in the DB transfer market – more than 2 years after finding that less than half of the transfer advice it reviewed was suitable. pic.twitter.com/scJ1O1i1Ft
— Josephine Cumbo (@JosephineCumbo) 19 June 2019
The FT solicited a comment from Frank Field who’d read the data results
“Today the FCA tells itself, again, that only about half of DB pension transfer advice meets its own standards” “The alarm is ringing, people are still losing their life savings: It’s time to wake up. More of the same kind of regulation just won’t cut it.”
During our fireside chat I asked Debbie whether she thought that market forces would turn the transfer tap off. Interestingly the FCA do not accept that the rate of transfers has fallen recently (as evidenced by the results of leading life companies who have benefited from the flows). You don’t have to probe hard to find why, most IFAs are now a lot more cautious about taking on CETV inquiries and many are on quotas from their PI insurers which give them limited scope to do more than a basic triage service.
Since the FCA are not accepting that the transfer market is dynamic and changing, I went on to ask what kind of intervention would follow. I asked Debbie straight whether the FCA would ban contingent charging. She would not be drawn.
Back at the ranch, Megan Butler, executive director of supervision, wholesale and specialists at the FCA , was telling the FT the same thing
“We have said repeatedly that, when advising on DB transfers, advisers should start from the position that a transfer is not suitable,” “It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.”
£83bn and counting
The £82.8bn that has transferred via advisers from DB to DC is from data submitted by IFAs – 99% of IFAs submitted data and the number relates to transfers completed since April 2015. There may be some pipeline, some non-advised transfers (where the CETV was less than £30k) and there may be some under-reporting. This may explain the gap between what advisers report to the FCA and the higher figures of what is reported to the Office of National Statistics.
Frankly, what matters is that the FCA reckon half of these transfers shouldn’t have happened (against an expected “poor advice” rate of 10%.But because the data published yesterday does not include a longitudinal breakdown (which I suspect would show a slowdown in transfers), it is hard to understand Megan’s comment in bold (above).
And because we don’t know whether the 50% (bad) number applies equally to 2018/19 transfers to 2017/18 transfers, the FCA will have to do more counting.
Meanwhile, the problems for those who transferred out back in 2015 are beginning to see a track record on their investments. The gains made when the markets were hot, are being eroded now the market is not (hot). If adviser fees , active management fees and platform fees are dragging back performance on pots already diminished by the contingent charge, the returns on the CETV itself may be looking pretty dismal.
By April of next year we will start to see five year track records on post freedom transfers and I’d like to see internal rates of return based on the CETV, not the amount post the contingent charge.
Since October of last year, IFA clients have been presented with a bar chart with two bars. The lower bar is the cash equivalent transfer value (CETV) on offer. The higher bar is a capital sum – the amount which, invested in a risk free way up to retirement, would generate a pot large enough to buy an annuity which matches the DB pension foregone. The idea is that this enables a client to see graphically how much of the ‘value’ of their pension they are giving up.
If this method were to be used by the FCA to sample the progress of invested pots since transfer against the defined benefit foregone, I think some of the numbers would be looking pretty scary (especially if compared with the pre- contingent charge CETV calculation.
While I appreciate that the performance tracks are short and that many people transferred for reasons other than investment, the bottom line is that the outcomes of these transfers are likely to be less security, lower pensions and increasing anxiety for a high proportion of the 162,000 people who have transferred since 2015 will be experiencing low returns, lower pension expectations and heightened anxiety.
We are continuing to see the FCA sporadically getting tough on bad advisers
It’s going to be a hell of a day on DB transfers today, let me tell you. And it starts with this << Swansea IFA suspended by FCA https://t.co/WyKL9vmR68
— Maria Espadinha (@Maria_Espadinha) 19 June 2019
But as yet we have seen no coherent move to identify, name and shame advisers who have consistently over-advised for transfer.
I sense from talking with Debbie , that this is only a matter of time.
The current sporadic action on those who have over-advised is not much of a deterrent to those still over-advising. If the FCA want to cut off the oxygen to the CETV transfer market they must ban contingent charging which is a clear conflict of interest and consider further interventions with regards the destination of CETV monies.
One further question I asked Debbie Gupta was whether she knew the percentage of the £83bn that went into the defaults of the workplace pensions that those transferring were saving into. These default funds are capped on charges, need no advisory charges and are designed for the needs of ordinary people.
Instead of using workplace pensions, the vast majority of CETV money has been invested into Self Invested (non-workplace) pensions where charges are higher and advice necessary.
I question whether the people in this poll taken from September 2017 and conducted on the BSPS members Facebook page, knew just what “letting their IFA manage” their pot actually meant.