Having recently rejected the idea of banning contingency charging for pension transfer advice, the FCA is for the second time in twelve months consulting on such a ban. The Work and Pensions Committee (WPC) had earlier this year asked the FCA to revisit this area, and the FCA have now, it seems, completely changed their view in a major U-turn.
In a consultation released on 30 July, the FCA concluded that too many advisers are delivering poor advice on pension transfers since the introduction of pension freedoms in 2015. Much of the poor advice, say the FCA, is down to the way they are paid, and in particular to contingency charging, where advisers only get paid if a transfer proceeds. Advisers do face some moral and client relationship challenges with DB transfers, particularly where people with DB pensions may be going to their adviser because they think a transfer might be a good idea. Charging money for giving advice that says “don’t do anything” may be challenging. Only charging when a transfer is appropriate and the client can pay from their pension fund rather than their bank account may feel like the right decision within the context of long term client relationships. But is that influencing outcomes?
The FCA’s starting point is, quite rightly, that for most people a transfer of pension benefits from a defined benefit (DB) arrangement to a defined contribution (DC) arrangement is a bad idea. There are exceptions, but they are few and far between, and would very much depend of an individual’s personal circumstances. Yet the FCA’s supervisory work has found 69% of consumers are being advised to make such a transfer, and they estimate £2bn of pension benefits a year are being transferred from DB arrangements following unsuitable DB transfer advice.
The FCA openly say the aim of their consultation is to reduce the number of people transferring from DB pension arrangements when it is not in their best interest to do so. The Government sought to stop DC freedom and choice being a catalyst for a wave of dangerous DB transfers by requiring anyone making a DB to DC pension transfer over £30k in value to obtain advice from a financial adviser authorised to conduct such business by the FCA. This has clearly not been successful in reducing the risk in a large percentage of cases.
Another point the FCA raises is that workplace pensions are often not selected by IFAs when a DB transfer is made; instead the transfer is often made to a personal pension where the IFA is able to charge ongoing fees from the fund. The FCA comment that typically, ongoing adviser charges range from 0.5% to 1% of a transferred pot and observed that recent data on pension transfers indicated 36% of consumers who transferred, invested in a solution costing more than 1.5% each year. This is in contrast to workplace pensions where charges are capped at 0.75% and are often below 0.5%.
The FCA, under some political pressure, is now tightening up in respect of some of its less reputable members. For most financial advisers, the proposed changes in the consultation will mean little change and I suspect many will welcome them.
One of the problems for individual members is understanding who are – and who are not – the more reputable financial advisers to go to. It’s not an easy decision, even for those with considerable pension knowledge. It’s an area where trustees and employers running DB occupational pension schemes are starting to do more by recommending preferred financial advisers to their members and staff, having carried out a due diligence exercise and established which advisers have the breadth of experience and scale to properly advise people on what is potentially a life-changing decision. Employers can pay up to £500 per year towards member advice and therefore may be willing to subsidise the cost of advice as part of a financial wellbeing strategy, or enable members to pay for advice from pre-tax pay through salary sacrifice. There may, of course, be a cost in carrying out this work, but on the opposite side of the coin, not doing it is, as we have seen, costing members, with £2bn a year of DB benefits being transferred out on the basis of bad advice.