The end of an era
After over three years of mounting pressure, the FCA yesterday announced it would be banning the practice of contingent charging for work on Defined Benefit transfers from October 1st. Although some pipeline cases will conclude in the next four months, it is unlikely that advisers will embark on any new work on a ‘no transfer no fee’ basis.
From now on advisers will have to charge the client the same if the transfer proceeds or if it doesn’t. This will either lead to uneconomic work for advisers (in which case transfer case-load will decrease) or the risk to clients of no transfer and a big bill , in which case the transfer won’t go ahead.
There may be some advisers who see the lure of funds under advice as sufficient to offer transfer analysis as a loss-leader, but the cost of professional indemnity insurance around transactions will probably make such a service unsustainable.
This does not spell the end of DB transfers, there will be a ‘carve out’ for people in extreme ill-health who will be able to capitalize future pension payments from their scheme , provided they are not within a year of normal retirement. Some wealthy people will pay for advice rather than the outcome of the advice.
But as a mass-market activity, the practice of transferring the pension promise offered by a defined benefit scheme to a pension pot with full market exposure, is finished.
If you want to read the comments of IFAs on the announcement, you can read there are around 100 behind this post
If you want to get the back-story, then you can read the parliamentary briefing published in mid May, and available here
The impact on IFAs
Many IFAs became heavily dependent on DB transfers not just for immediate income from the conditional charge, but for the embedded value to their businesses of advising on the proceeds. Many who had the permissions were able to take a charge on the transferred assets in return for discretionary management agreements that made them not just advisers but fiduciary managers.
The cessation of new flows is likely to have relatively small impact on IFAs who have seen the end of contingent charging coming. It’s estimated that 700 IFA firms have already resigned their transfer permissions and some have had them taken away.
The FCA are currently carrying out a number of investigations into the activities of some advisory firms including Lighthouse, that was recently purchased by Quilter (formerly Old Mutual and previously Skandia). Quilter are reported to have set aside a substantial sum as a provision against future claims.
Ominously for many IFAs , the FCA have announced that they will be writing to all 7700 steelworkers they can find, who transferred out of the British Steel Pension Scheme. The inference to steelworkers is that there is money on the table. In the case of Lighthouse advised cases the source of that money is clear, but many smaller advisers with less resource behind them will need to rely on their insurers. In many cases the excesses they will need to meet themselves will severely impair their businesses.
The FCA’s sampling of transfer cases from BSPS only gave a clean bill of health to one in five cases, in total well over 3bn GBP was transferred and BSPS is only one of a large number of schemes that were systematically targeted by advisers.
While criticism of the FCA has focused so far on the impact on the availability of advice, the much greater worry is the impact on the sustainability of adviser’s businesses.
The impact on pension providers
In terms of pension provider finances, the continuation of a pension transfers was a win-win. Defined benefit schemes were able to de-risk, sponsors reported transfers as improving the corporate balance sheet. Money arrived in SIPPs and to the large insurers with no risk attaching. The major insurers who benefited included Prudential, Royal London , Zurich and many other household names. Those insurers who had vertically integrated propositions such as Old Mutual, Standard Life and in particular St James Place were particularly well positioned to benefit from transfer inflows.
Tom McPhail, now released from PR duties at Hargreaves Lansdown has commented
FCA reports poor quality DB transfer advice. Cue much platitudinous hand-wringing from pension providers who were happy to hoover up AUM like coke heads on a bender while the good times rolled
— Tom McPhail (@McphailTom) June 5, 2020
It will be interesting to see how the markets see the FCA’s intervention with regards insurer’s liabilities.
The further from the retail coalface you go, the more beneficial the flows from DB to DC became. Retail margins on funds transferred are not subject to any cap and the pressure experienced on fund management margins by trustees and their advisers made for good business ‘upstream’.
Whether transferred monies are going to stay in high margin funds is hard to predict. If the FCA review is ongoing , it is likely that it will focus not just on what happened but on what’s happening and this will mean having to justify the high cost of ownership of the personal pensions managed by wealth managers.
DB pension schemes
News of the FCA’s announcement has been welcomed by the PLSA . But I suspect that it is not over-celebrating. Many large pension schemes have invested in technology to give members on-line transfer value quotations. This at a time when large numbers of members face the likelihood of redundancy. These transfers are now all dressed up with nowhere to go.
Only last month, British Airways announced that online transfers were available days after announcing that 12,000 jobs were at risk. The trustee and corporate agendas were to some extent aligned since – in the dystopian world of pension accounting, transferring members out at today’s high CETV values, benefits the scheme’s funding position (and the corporate balance sheet). It also sets the FCA’s agenda of protecting consumers against the Pension Regulator’s agenda of protecting the PPF.
One of the very few areas within pensions that has been untouched by DB transfers has been the DC workplace pension. Since the transfer process was inextricably bound up in advice, it was likely that the advised solutions to the ongoing management of the transfers would be controlled by the adviser – not by an insurer+employer +IGC.
I have yet to read one IGC report that mentions the influx of money into the insurer from DB schemes, this is because the IGCs look after the workplace pensions not the SIPPs . Ironically much of this money may be destined for unadvised investment pathways (for which IGSs and GAAs are responsible.
I argued during BSPS’ Time to Choose that Tata and Liberty’s workplace pensions (with Aviva and L&G respectively) should have been promoted by IFAs as a transfer alternative. I have never seen figures published on how much of the BSPS CETVs made their way to the workplace pension schemes that active steelworkers had open to them.
However I suspect that many who have transferred from schemes such as BSPS do have good quality schemes (such as NEST) into which transfers could be made. It would be good for the FCA to be thinking of investment pathways for funds orphaned of advisers or needing a radical rethink with regards value for money.
The impact on the public
The FCA have had this question in the front of their minds since the day when Frank Field and the DWP Select Committee first grilled Megan Butler and her team.
Last summer I met with the FCA’s Chairman who asked me the simple question “do you think contingent charging should be banned?’ I said yes (with a carve out for the very sick). The discussion focused on the impact on the public of losing the freedom to do what had been granted it in 1986 by Norman Fowler – to freely move DB rights into a personal pension.
The FCA have not of course banned that right, but it has made it sufficiently difficult for most people to transfer as to have taken this freedom away. For those who have not taken a transfer, the door has effectively been shut and it will be interesting to see whether there is public outcry.
It will also be interesting to see the extend that the public seek redress. This is taken from the aforementioned Parliamentary briefing (updated yesterday).
Where a DB transfer has been made on the basis of unsuitable advice, the individual may be able to make a complaint and, if upheld, get redress to put them, as far as possible, back into the position they would have been in if they had not received the advice.
To get redress consumers must first complain to the firm that gave the advice. If the individual is not satisfied with the firm’s response or the firm has not responded, they can complain to the Financial Ombudsman Service (FOS). If the firm that gave the advice is insolvent and cannot pay compensation, a claim can be made instead to the Financial Services Compensation Scheme (FSCS).
Both the FOS and the FSCS have reported rising levels of pension complaints. Financial advice firms have expressed concerns about the consequent rising costs of the levy and professional indemnity insurance.
Some have speculated that there might have been a “multibillion-pound mis-selling scandal” related to this financial advice. The extent of any problem might only come to light in the event of an economic downturn, when the implications of a decision to switch to a DC pension might become clearer to members.
We wait to see.