Pension freedoms come in different guises. “Pension liberation” was a practice of pension busting that led to unauthorised payments being made to hapless victims of pension scams such as Fast Pensions, such practice is illegal and leads to heavy fines from HMRC.
“Pension Freedoms” are most usually associated with the payment of pension pots as savers demand rather than as annuities, these freedoms resulted from a change in tax law in the Finance Act 2014 and were the responsibility of the Treasury.
But the pension freedom referred to by Andrew Bailey in his answers to Nick Smith MP at the Parliamentary Public Accounts meeting yesterday go back to 1988, when the right to a cash equivalent transfer value from a funded pension was introduced. It seems to be to this kind of freedom that Andrew Bailey was referring yesterday
I was called into the FCA in 2019 by it then Chair to be asked whether contingent charging was in my opinion creating a conflict of interest for advisers. I said it was, the conflict being between the adviser getting paid and the adviser doing the right thing. A pension adviser would not get paid for telling a client not to transfer but would get paid if the transfer went ahead – red flag. The Chair agreed.
What Andrew Bailey talked about yesterday was a different matter. By using the emotive term “pension freedoms” in relation to DB transfers – he suggested that the FCA were conflicted between supporting the advisers and providers that have benefited from the surge in transfers since 2016 and preventing the consumer harm from a high proportion of those transfers which were deemed “ill-advised”. Contingent charging , Bailey claimed – kept pension freedoms alive
‘If we banned contingent charging, the evidence suggested that would lead to much higher charges. The idea of charging everybody, whether they transferred out or not, I think would have had quite an effect on killing the pension freedoms.’
If Bailey saw his role as creating and maintaining the profitability of the pension advisory sector (and the SIPPs that it fed) then this gives credence to why the FCA was so reluctant to turn off the tap. But that had nothing to do with what the public consider pension freedoms; instead it suggests that the FCA may even have been complicit in pension mis-selling.
This confusion is common in the pensions industry, here is a chart from Quantum Advisory which was posted with an explanation that it was the pension freedoms that drove up CETV demand.
While it might have seemed plausible, the increase in activity coinciding with the introduction of the new tax rules in April 2015, it is more likely to have been created by the introduction of conditional charging which began in 2015. This would explain why small CETVs (which didn’t need advice) remained static in numbers while large transfers (which needed advice and paid big fees) took off. Add to the attraction of a “no win- no fee” charging structure, the massive increase in CETVs (as discount rates dropped) and it’s easy to construct an argument that transfer activity was driven by commercial rather than consumer demand.
This view is reinforced by reports that within 6 months of the banning of conditional (contingent) charging, LCP was reporting transfer activity halved. The steep decline the activity has since plateaued, suggesting that there is ongoing demand for transfers at a much lower level- no one disputes that while up to 40% of transfers shouldn’t have happened – 60% should have.
If this was the case, Bailey’s fear that banning contingent charging would have thrown the baby out with the bathwater was groundless.
What was the policy intent?
For the first time, Andrew Bailey has given an explanation for why the door to transfers was kept ajar for so long but the explanation confuses the freedom to spend the pension with the freedom to transfer. While I am sure the freedom to spend the pot how one likes has added extra spice to the CETV market, it was conditional charging not the Osborne tax-reforms that created the £80bn bonanza that FCA authorised firms enjoyed in the five years leading up to the eventual ban.
My worry is that conditional charging was responsible for the bad transfers and it has only been since October 2020 that the bad transfers have dwindled. Of course there are other factors – most notably the availability of PI insurance for those advising on and implementing CETVs.
If Andrew Bailey’s explanation is that contingent charges supported transfers, then I consider it plausible, that it supported the pension freedoms is not. The statement is ambiguous and suggests confusion in its CEO’s understanding . But a bigger worry is the thought that the FCA were in the thrall of pension advisory interests and conflicted themselves. The delay in implementing the ban on contingent charging remains a mystery and perhaps that’s the way it had better stay.