The FCA can’t blame the DB transfer debacle on pension freedoms.


Nikhil Rathi


Nikhil Rathi, the FCA’s CEO elect is only partly right in linking the upswing in transfers away for DB schemes to the precipitous introduction of pension freedoms.

It is very important that the FCA properly understand the cocktail of factors that have and continue to make transfer values so attractive that of 250,000 transfer cases coming across advisers desks, 70% were signed off and monies transferred

In January, a  freedom of information request revealed that the FCA was planning to write to 1,841 financial advisers about “potential harm” in their defined benefit transfer advice. This represented 76 per cent of 2,426 advisory firms advising individuals between 2015 and 2018, when pension transfers began to boom

The impact on the availability and cost of financial advice will be of immediate concern.

But of longer-term concern is that the estimated £70bn which is no longer under the stewardship of pension trustees but in SIPPs managed by wealth managers is no longer providing a wage for life solution for those who have taken transfers, but something quite different. A major slice of financial security for a sizeable portion of the population is now at risk from mis-management.

The impact on the financial security of the lucky generation of those who had DB pensions is of longer term concern.  Nikhil Rathi must be clear about what has happened, the causes of this problem go much deeper than the introduction of pensions freedoms.

Cause one – transfer values are needlessly high

Transfer values of 40 times the pension are common, they arise from discount rates trending to zero as pension schemes de-risk. De-risking is supported by the Government’s own Pensions Regulator as a way of protecting the PPF. These high transfer values make it easy for advisers to show that by reinvesting into growth portfolios, ordinary people are better off out.

This has nothing to do with pension freedoms and everything to do with the extraordinarily low yields trustees have achieved on low-risk investments – such as Government bonds. This has everything to do with quantitative easing which has created artificially low yields and artificially high transfer values

Cause two short-termism among the DB stakeholders

Part of de-risking has been the promotion of pension transfers by employers and trustees of enhanced transfer values through corporate IFAs. These “exercises” are typically advised on by corporate pension specialists and lawyers who carry no liability for the outcomes. The corporate IFAs – such as LEBC have recently been hung out to dry, while the employers, trustees and their corporate advisers have received no sanction.

In the short term, the encouragement of transfers has led to substantial improvement in corporate balance sheets. Unfortunately these short term gains have been achieved at the expense of the financial security of those who have taken the offers presented to them. These exercises have been nodded through by the Pension Regulator whose aim is to see risk transferred from schemes (and the PPF) to members.

Again the primary driver is not pension freedoms but the short-termism of all parties concerned with pension scheme management to aid and abet those advising on transfers- to transfer. The adviser is pushing at an open door. Nobody was protecting the member – not employers, trustees, the FCA, tPR or the corporate and financial advisers.

Cause three – the incentive to advisers

Around 2015, financial advisers worked out that they could get round the obstacle that the FCA had placed in their way on transfers. The Pension Act 2015 required schemes to only release transfer money if an advisory certificate was produced recommending  the transfer. The idea was that this would stop the flow of transfers but it did quite the opposite. Advisers found that they could charge for advice which 70% of the time would lead to a transfer but take the money out the proceeds of the transfer. This was tax-efficient and effectively created  a no-win no-fee culture.

Phrases like “no-brainer” were regularly in use to describe the decision people had to take about DB benefits, it was a no-brainer because it seemingly cost nothing – the value of contingent charging. The rewards of using contingent charging with transfer value advice were huge. With average transfer values of £400,000, it was common to see 2% as an initial charge with a 1% charge on assets transferred for ongoing advice and maybe another 1% charged for managing the assets.

Once again this cause has nothing to do with pension freedoms and everything to do with short-term gain for advisers. The FCA is  finally banned contingent charging from October but the damage has been done.

Cause four – pension freedoms

The prospect of being able to spend the money from a transfer as the member pleased, certainly helped sell transfers.

But I suspect that even if the pension freedoms hadn’t happened, people would still have been able to enjoy much of the freedom, both from tax-free cash and from drawdown.

The amount of a £400,000 CETV needed to be ring-fenced and used for annuity purchase would have been insufficient disincentive, especially as annuities themselves pay IFAs quite well. There is not space here to go into ways round annuity purchase for those with wealth but anyone advising on large DC pots in the first years of last decade had plenty of scope to liberate pots from the clutches of annuities.


It would be convenient for Nikhil Rathi and the FCA to conclude that the problems with pension transfers were down to the over-hasty introductions of pension freedoms. But it would wrong.

In truth what happened over the past five years because it was in everyone’s short-term interest to see transfers go ahead. Though both the FCA and tPR protested about the number of transfers, they were not so concerned as to stop them happening. TPR got de-risked schemes and an under used PPF, the FCA had a burgeoning advisory sector and the Treasury could see tax revenues surge as pension money surged back into the economy as people accelerated the taking of their pension benefits.

But the longer term issue is that our DB pension schemes are denuded of future pensioners and Britain is faced with a very real possibility of seeing the currently wealthy boomers finding themselves a burden on the State in later retirement.

The FCA cannot walk away from responsibility for what has happened. A new CEO should not be allowed to  blame the Treasury. What happened , was happening even before 2015  and has continued ever since.

The banning of contingent charging in October may turn off a still dripping tap, but it is not the FCA that has stemmed the flow so much as the Professional Indemnity insurers who have denied advisers the protection to write new transfer business.

The FCA may take some credit for putting the wind up PI, but that is about all they can take credit for. Stopping firm like Tideway and Quilter months before contingent charging ceases is just too little- too lates.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The FCA can’t blame the DB transfer debacle on pension freedoms.

  1. Dr Robin Rowles says:

    I can see why you would say that “short-term-Ism” is the main problem, after all, no government bothers these days to look beyond the next General Election but, really, does that really take away the blame from Pensions Freedoms? But aren’t the roots of the whole problem planted in “Thatcherism” and the daft regulations she and her government brought in, that drove people to DC and to therefore thinking they knew better and could do better, than their companies Trustees. Fat chance! In the 10 years I was a Trustee, the company’s Pension Fund doubled in value (not due to my skills .. ). And DC?

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