This blog is a response to a Facebook post by Al Rush , who for the past five years has been helping steelworkers understand the precarious position of their savings following transfer to personal pensions by their financial adviser. I’ve been sharing them with Al and have incorporated his comments on the matter s raised
In his post, Al explains the difficulties facing steelworkers, FSCS, FOS, advisers and the regulators. The issue is not just about the transfer advice but about the advice that has been paid for, but often not received, in the intervening period.
This is a matter of a new set of claims which many steelworkers are making with the encouragement of an enthusiastic group of claims managers.
Al wants to explain to ordinary steelworkers – many of whom have become his clients- why it is that compensation is varying on what appears an arbitrary basis. In fact many of the steelmen have done themselves out of “compo” for such an obscure reason that they must be questioning whether the system as they have experienced it is fit for purpose.
The scope of a claim is determined by incomprehensible rules
Al focusses on the time period against which a claim can be made. Al’s post refers to a document known as an FG17/9. This is the public document which refers to how pension compensation is calculated. The general principle behind mis-selling redress is to put clients back in the financial position they would have been in had they not been moved out of the defined benefit scheme.
In the first mis-selling scandal which started in 1988 and continued to around 1994, redress was made by buying people back into pensions.
Lurking behind the FG17/9 document are unpublished rules defining concepts such as “retirement”. Al refers to these rules , simply as “1994”. These rules was eventually given to Al by the FCA he’d been denied it by the Financial Services Compensation Service (an organisation Al Rush considers in need of a reform).
1994 defines you as “retired” for the purpose of compensation at the point when the DB scheme started to pay a pension. But without the capacity to return people to their DB schemes (BSPS has not allowed this), a proxy for retirement age needed to be found.
One large advisory network has agreed with the FCA that “retirement” can be defined as the point at which the transferring pot stops accumulating and starts paying out. This has been agreed as the point of the first drawdown, typically a pension tax-free cash sum.
Having established a precedent , it appears that the FCA and FSCS are now limiting claims for compensation on transfer advice to the point when the first drawdown is made. This is advantageous to advisers and FSCS but bad news for former BSPS members.
In 1994, that would have been the point when someone would have swapped a pot for an annuity and dispensed with the adviser, but in 2022, starting drawdown is the point at which the advisor is most needed. There is no correlation between drawing from a pension pot and retiring, the definition is convenient to advisers and FSCS as it limits claims, but it not just.
How “1994” is creating what seem arbitrary levels of compensation
Many of the steelworkers Al Rush is talking to were advised to take money from their pot at the earliest possible point, creating a retirement event as early as 55. This has limited their claims for compensation to that point. The advisers found that there was no better way of ingratiating their clients, than to make them feel rich (or at least comfortable), so many advised the newly liberated to exercise their freedoms and drawdown asap.
Al Rush goes on to explain that the dynamics of a drawdown scheme were not generally explained at the point when accounts were set up. This section is taken directly from a post on Facebook to steelworkers who have taken transfers and soon after taken cash from their pots (typically tax-free).
Going into drawdown is, or should be, complicated. It’s not simply a case of you deciding to tell your IFA what you require and them simply obeying you. What many don’t realise is that Drawdown is an incredibly complicated subject, and the regulator (the FCA) treats its potential consequences as seriously as it does a pension transfer.
I imagine that many of you will be saying “It’s my money, I can take it as I like!” but a good IFA’s professional responsibilities and duty extend to understanding why you want to take tax free cash/income now. The reason may be something as simply as you needing it or you simply wanting it just because you can.
The limitation of compensation results from steelworkers taking their tax free cash as soon as they could, Many didn’t need it , but wanted it – or were convinced they wanted it . Advisers who encouraged early withdrawals are now being protected by “1994”, while those who encouraged steelworkers to hold back on drawing their money are finding they need to pay much bigger compensation bills. I am not suggesting that advisers used early drawdown to limit claims, but that’s what’s happened.
This is a case study in the failure of the compensation system to address today’s problems.
Guidance made in 1994 cannot be applied 28 years later without due regard to new circumstances. For steelworkers to make sense of compensation , “retirement” needs to be aligned to expectations of pensions when in BSPS, typically this was for an early retirement age of 60 .
So firstly, FSCS and FOS need to ditch its new link of retirement to the first drawdown. Compensation for poor transfer advice and investment advice relating to the personal pension should be linked to the normal retirement age of the ceding (DB) scheme.
Secondly, FSCS needs to find a way to address the question of whether retirement advice received is value for money.
Thirdly FSCS needs to build a credible way to compensate people for poor advice on the drawdown and holistic retirement issues.
Explaining where compensation may be due on retirement advice
Al Rush’s post explains how advisers should have a very different duty of care towards their clients – in 2022.
For those now looking to retire and take an income from their pensions, stockmarket volatility can have a significant impact on your income sustainability (if these risks aren’t managed efficiently). The reason I say this is because Drawdown is and always has been a risky product, one that will not be appropriate for every individual, and the FCA, the Regulator, has continued to stress its concerns with the suitability of drawdown advice (so much so that this remains one of its focus points in its business plan for 2020-21 and (I think I’m right in saying), the following year as well.
Al Rush goes on to explain how drawdown has become the normal pathway for people looking to pay themselves an income but he sees the adviser’s duty of care to include the re-evaluation of a client’s circumstances over time. The note talks of providing solutions involving both drawdown and annuities
For those clients for whom drawdown may be appropriate, the recent turbulence in stockmarkets resulting in both lower investment performance and lower asset return assumptions has shown that getting the income level right is key. So, we will be looking at the distinctions between your essential and desirable income needs and seeing if we can cover off the essentials with a partial annuity, for instance.
He explains that advisers need to question and inhibit clients from acting against their own best interests.
The value of anyone’s Adviser is to show to you the impact of not just current market conditions but also investment performance and actual client income levels on income sustainability. This means they can responsibly adjust income levels to reflect the wider economic environment and ensure they maximise the likelihood of sustaining income throughout retirement or until annuity purchase.
And having an adviser involves two-way engagement .
For instance, and to support the advice process, questions include why do you want to take your benefits now? This is key to any recommendation. A suitable and valid reason why you want to take your benefits needs to be documented and I’m afraid that involves a measure of discussion. It might seem a pain, but it’s in your best interests and is why you pay your adviser. If you are taking a tax free capital sum, without a taxable element, your adviser must ask questions and document the reason(s) why the capital sum is needed as this would reduce or remove the option of using this to provide a more tax efficient income option in the future.
Talking the tax-free cash sum up-front seems (as taking the transfer seemed) a “no-brainer! But for all kinds of reasons it is not. It creates tax problems if you start saving again (MPAA) as Al alludes to, but – and there is evidence that this happens – it often means financial self-harm in other ways, not least the loss of tax- advantaged investment growth. Al Rush makes the point with an anecdote.
One of the very first steelworkers I spoke with in South Wales had a transfer pot of £500,000. Gareth told me that he was told by his local adviser to pull out max PCLS. I asked him why he agreed. He thought for a moment and said “Because I love going to Tesco, putting my card in the hole in the wall and seeing a hundred grand in there.”
Compensation for poor advice on the drawdown should not be confused with advice on the transfer or its investment. The second and third points (above) relate to compensation for poor retirement advice.
The remainder of Al’s post, which I include for completeness (see appendix below), goes on to explain how an adviser should be behaving towards their clients and what steelworkers should be getting for the fees they are paying. The reality is that many former members of BSPS get little or any of this and instead are engaged in a redress process which is about to be the subject of an investigation by the National Audit Office.
To be clear, a claim for poor in retirement advice should be independent of any claim for poor transfer advice and investment advice relating to the personal pension
Re-establishing a claim for those advised “in retirement”.
That it takes Al Rush over 2000 words to explain these things and that he knows many will read this in full to get to the point where they know their options, tells me the scale of the problem facing the NAO.
Eventually there is a call to action. Right now the claim may be that the inability to claim resulted from wrongful advice.
If you do believe you had a drawdown service that may have disadvantaged you, and where a compliant file might not even exist to support you taking money out and as a consequence you had a far lower level of compensation, you might want to gauge your solicitor’s level of appetite in supporting you with a separate complaint, or going directly to FOS yourself.
This may open a limited door to redress for some excluded by having taken a lump sum from their pension. But this is not addressing the problem in a systematic basis. The NAO needs to get back to first principles.
Compensation should be paid on any occasion where it can be proved that there was financial malpractice, this includes charging for services that were not delivered. It was, and is, common practice for advisers to charge 1% pa for financial advice over and above the cost of providing discretionary fund management.
From my limited experience of dealing with steelworkers, I doubt many if any properly grasped the implications of going into advised drawdown and of the kind of service they might expect from advisers to whom they were often agreeing to pay in excess of £5,000 pa in advisory fees. But they did expect to get a service for their money which would replace what they were giving up (the BSPS pension).
Of course, no adviser understood that by triggering a drawdown payment a client was limiting their claim for compensation but herein is the point. The compensation system, like the advisory obligation, is so much too complex for anyone but lawyers to understand.
But advisors taking 1% pa for advising clients (plus in many cases wealth management fees), must have considered what that advice would pay for. The failure of many advisers to deliver on many (if any) of the items listed in the Appendix below, is why the NAO must focus not on excluding, but including, those who were advised “in retirement”.
That will mean reversing “1994” and including those who were advised after taking Pension Cash Lump Sums. That will be a very painful business, but one that must be conducted.
Appendix – the advisory process for drawdown explained
The following paragraphs are taken directly from Al Rush’s post and are the first explanation I have read that explains the value of advice to blue-collared workers.
I suspect it will encourage many steelworkers to look for better from their advisers, or where no such adviser remains , from FSCS. It is vital that those who have been mis-sold ongoing advice , are put in a position to make a claim for “advice not given”. This claim should be independent of redress for bad transfer advice and advice relating to the investment management of the personal pension.
Benefits and Qualifications for Benefits/Pension Benefits may also be impacted and by accessing the money this will be means which are assessable for benefits claims (including any pension credit/savings credit). So an adviser needs to make sure that you will not be losing out on benefits. If you are going to lose any benefits the loss will need to be documented and justified.
Your adviser should also be finding out whether you could be entitled to any benefits you don’t already claim. A copy of the report/research should be included with the file, and these can be obtained by you, from researching the government web site. Inheritance Tax (IHT) and Legacy planning will also have to be considered. Any money removed from a pension could form part of the your estate on death, making it potentially liable to IHT. The adviser will need to show that you will not incur an IHT bill or higher IHT liability when the money could be kept outside any IHT calculation.
With the new Rules regarding inheritance of annuities, when a pension is being crystallised the issues of inheritance should not be ignored. One of the very first steelworkers I spoke with in South Wales had a transfer pot of £500,000. Gareth told me that he was told by his local adviser to pull out max PCLS. I asked him why he agreed. He thought for a moment and said “Because I love going to Tesco, putting my card in the hole in the wall and seeing a hundred grand in there.” That might be an extreme instance but it’s professional suicide for any IFA to suggest or support that. Gareth died far too early just before Christmas, bless him.
The standard scenario for pensions has been to take the full Pension Commencement Lump Sum (PCLS) at outset. The new flexibility Rules, together with the possibility that new products may be introduced in the future, could reduce the instances where this occurs or may be necessary so I must show that the PCLS is needed and that you will benefit from having this.
A Firm should have a specific Pension Decumulation (aka drawdown) Policy to ensure they follow a robust and repeatable process, in order that they are satisfied and are able to evidence that their advice and recommendations are suitable for client’s and in their best interests. Some of the areas included within an appropriate policy should be as follows:
Additional information required during Fact Finding, where a client indicates they may wish to start taking benefits from their pension arrangements:
1. Why does the client want to take their benefits now? This will include what they intend to do in retirement (short term and long term) and any need for flexibility.
2. What income does the client need? Also to include evidence of other sources of income.
3. The Need for a Lump Sum
4. Any requirement to provide for dependants, both now and in the future.
5. Client’s state of health
6. Client’s financial discipline and vulnerability. Including the client’s ability to control their finances.
Research requirements:
1. Sustainability of Income Model
2. Annuity quotation – enhanced/impaired life if necessary
3. Benefits and Qualifications for Benefits/Pension Benefits
Upon completion of the Fact Finding and Research process, a detailed suitability report should be issued to cover the clients aims and objectives, details of the specific recommendation, and appropriate risk warnings. This should include details of the sustainable amount of drawdown/withdrawal. Upon receipt of this recommendation, if this is accepted by the client, the Firm is able to facilitate the withdrawals.
You may have asked the Firm to arrange a transaction, but not asked for, or received advice or a personal recommendation. The regulatory rules require that any proposed Execution-only transaction must be subjected to an assessment of appropriateness test. This requires a Firm to determine whether the client has the necessary experience and knowledge in order to understand the risks involved in the Drawdown product/servicer demanded and make a written record of its determination This should include: (1) The types of services, transaction and investment with which the client is familiar, (2) The nature, volume, frequency of the client’s transactions in Pension/Drawdown products and the period over which they have been carried out, (3) The level of education, profession or relevant former profession of the client.
If the Firm concludes that the product or service is not appropriate to the client, the Firm must inform the client as to why it is not appropriate to satisfy their need. My compliance oversight process simply does not allow me to process any transaction or service on behalf of a client where it involves an inappropriate product of service or that the client’s best interest rule will not be satisfied it the client were to proceed.
However, more widely, on completion of an Execution-only transaction, the Firm in question must confirm in writing to the client that the transaction was arranged about on an Execution-only basis, and the client does not have all of the statutory protection under FSMA 2000 (the legal stuff), that would have been afforded had a personal recommendation been made.
Where a client deals directly with a product provider, and the Firm is not involved in any part of the transaction. As soon as the Firm become aware of the transaction by the product provider, it should make a note of this on the client file, and inform the client in writing that it has become aware of the client’s engagement with the product provider and confirm that no advice was sought or received from the Firm in respect of the transaction.
My IFA Network simply does not permit Insistent Client transactions on any product type. For me, this means where the client does not accept my personal recommendation, I am required to formally disengage from that transaction immediately.
So, in respect of Drawdown advice, if the client does not accept my personal recommendation I must:
• Document all the reasons why the client does not wish to follow my recommendation
• I would not be able to facilitate withdrawals as the client has not accepted my recommendation. They would need to go to the pension provider directly.
It is the position of the FOS that Insistent Clients will be very rare. The FOS consider that any client engaging with an adviser is very unlikely to act against the advice and recommendation of the adviser. However, in respect of anyone receiving advice from a national chain in the North of England to go into drawdown after a fifteen second chat on the phone maybe, and where a compliant audit trail and file to support a drawdown request might not even exist, the view may be taken that the service you received was sub-standard.
Almost coincidentally to that, and where the consequence of separate advice to transfer out may already have been determined and/or conceded to be bad and where a far lower level of compensation may have been offered as a direct consequence, you might take the view that this was the second occasion you were let down by that firm, and you might wish to seek advice from either a solicitor acting on your behalf or the FOS about whether or not you have grounds for a second complaint unrelated to that involving your pension transfer.
I am not qualified or authorised to offer advice relating to claims management so it has simply been my intention within this laboriously tapped out post on my iPhone to point out to you the situation as it exists from my perspective as an adviser, and how that might relate to you. If you do believe you had a drawdown service that may have disadvantaged you, and where a compliant file might not even exist to support you taking money out and as a consequence you had a far lower level of compensation, you might want to gauge your solicitor’s level of appetite in supporting you with a separate complaint, or going directly to FOS yourself.
I hope that was helpful. If you got this far, have a gold star.
