Ongoing conflicts of interest
We are proposing strengthening our existing requirements that advisers giving pension transfer advice should consider an available workplace pension as a receiving scheme for a transfer where one is available.
This is intended to address the conflicts of interest created by ongoing advice charges. It will also reduce the level of transfers involving unnecessarily complex and expensive solutions.
When I went to Port Talbot I asked some of the steelworkers whether they were contributing to the Aviva workplace pension that Tata had put in place. Some had left Tata’s service some time ago and had no DC plan but most either were in the Tata plan or had moved on to new work and were auto-enrolled into some other workplace pension.
Not one had had a conversation with their advisors about using the workplace pension , the option had not occurred to them. When I asked them whether anyone from BSPS or Tata had mentioned the plan as an alternative to the solution proposed to them – the answer was “no”. I asked the union people and they hadn’t clicked that the option was open.
The cost of the Aviva plan was around 0.30%. When I asked about GreyBull I found it had a similarly priced workplace pension with L&G – both were GPPs.
A month of two later, Michelle Cracknell – as CEO of TPAS asked the same question at a meeting of steelworkers convened by Al Rush and also attended by the FCA.
Since then I have put it to Aviva and L&G that they could have been more pro-active about promoting their workplace pensions, they were reticent to discuss the issue, it was clearly a difficult one for them, conflicted as they were by obligations to Tata and Geybull and reputational risks with the FCA, tPR and ultimately the general public.
Where do all the CETVs go?
Now – getting on for two years later, the FCA are recognising that the vast majority of CETVs never end up in workplace pensions.
The evidence from LGG and other occupational DC plans is the same as from Aviva and L&G – their Your Tomorrow plan – which has no member charges at all – was studiously avoided by advisers – despite losing over £3bn to CETVs in 2017.
At one time the Trustees of Your Tomorrow did not take transfers in, although this has now changed (following questions about who the scheme was supposed to be protecting)
So the question posed by today’s CP19/25 consultation, is relevant to all occupational pensions – including NEST – which can take transfers (and doesn’t charge 1.8% on entry for one off payments).
DB schemes pick up 100% of the cost of managing the pension, with DC pensions it is quite different. As this survey of pension trustees shows, even the experts find it hard to understand who is picking up the costs.
Although there’s plenty of “don’t know”, it’s clear that most of the costs within a workplce are subsidised by third parties.
What CP19/25 is proposing is pretty radical. Not only are IFAs to make the option of the workplace pension available, they are actively to promote it.
While cost is not everything, the FCA’s thematic review discovered that the cost of the advised solutions proposed for taking the CETV were high
Typically, ongoing adviser charges range from 0.5% to 1% of a transferred pot. From the Financial Advice Market Review Baseline report, we know that the typical level of ongoing advice charges on amounts exceeding £200,000 is 0.66%. From our DB4 data collection, we also know that 36% of consumers who transferred invested in a solution costing more than 1.5% each year.
These numbers sound a little abstract – certainly they’d be meaningless to the people I met in Port Talbot, but the next paragraph in the consultation is a killer
Total ongoing advice charges of 0.5% to 1% will reduce an average transferred pension pot of £350,000 by £145 to £290 each month in the period immediately after transferring. Similarly, ongoing product charges of 1% to 1.5% will reduce it by a further £290 to £440 each month. So the total deductions on a transfer value of £350,000 would range from £435 to £730 each month. A DB scheme with that size of transfer value might have a current income value of £1,000-£1,200 each month, so the charges represent between 44% and 61% of the current level of that value.
Put even more simply, the extra cost of the advised solution could amount to anything between 44 and 61% lifetime pay cut.
Was that what the steelworkers signed up to? I don’t think so.
The simple answer is that according to the FCA around half of the value of the CETV could be leaked into the hands of advisers. This is what I termed “fractional scamming”. If you want to read about a particularly egregious form of fractional scamming – try following my researches into where the money went after Active Wealth Management had done their work. I suspect that the total cost of owning the Vega Algorithms 5 Alpha solution could well have been double the total charges identified by the FCA.
Never too late to put wrong the right
The noise we made about the plight of the steelworkers was in Q3/4 2017. It’s now two years later and we are at last discussing practical steps to put matters right.
But it is still the right time to put things right. Because unless we shut the stable door, yet more horses will boult. And once we’ve set a principle, we can start applying that principle elsewhere.
Because all these extra costs of ownership need to be justified as value for money and that justification needs to be repeated year after year – if we are not to see these advisory services becoming as derelict as the promise made when upfront commissions were taken.
The FCA are waking up to the fact that much of the advice paid for by those taking CETVs is not being given – probably because it was not needed in the first place.
If advice is not needed then the workplace pension is enough. And in case we start thinking of workplace pensions as “anti-advice”, let’s remember the ones – like Salvus – that are open to any regulated transfer and will pay adviser charging – provided that charge is justified.
I can argue the case for adviser charging to be available from all workplace pensions (including NEST) provided that the advice can be justified on a value for money basis.
So what of the future?
This is what the FCA is proposing in future
We propose to require firms to demonstrate why the scheme they recommend is more suitable than a WPS. This is intended to make it easier for an adviser to recognise the benefits associated with recommending a transfer into a workplace pension rather than a non-workplace DC pension. Firms will also be required to include analysis of a transfer into the default arrangement of an available WPS in the APTA which provides the evidence for the suitability report.
This reminds me of the tone and the Remedy of the RU64 regime put in place at the time of the introduction of stakeholder pensions. Advisers could sell more expensive solutions, but to comply with RU64 – they had to explain why the more expensive solution was suitable.
There are valid reasons for not using the workplace pension.There not being one – is such a reason, there being no transfer-in another (banning transfers-in is a decisions for trustees to justify) and another is that the client is about to drawdown and doesn’t have the capacity within the WPS.
Which makes for more interesting discussions with the trustees of occupational pension schemes that don’t offer the full range of drawdown options.
And what of the past?
I imagine that Phillipa Hann and other lawyers seeking restitution for clients will be studying these proposals from the FCA with a great degree of interest.
While they do not give those who’ve transferred restitution, they ask some pretty awkward questions of IFAs who are currently remunerated from the proceeds of the transfer. They also ask questions of the other participants in the “non-workplace pension” value chain.
Chapter four of CP19/25 is going to make uncomfortable reading for a number of people.