Pension FreedomJul 5 2017

Cut off pension bandits at the pass

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
comment-speech

‘Pension transfer’ are two simple words but they unleash a huge genie capable of ravaging the pensions and adviser sectors if not handled correctly. Get it wrong and the financial services sector can wave goodbye to any chance of building public trust for generations.

Defined benefit pension transfers are a serious matter and I am not surprised they have drawn FCA attention in recent weeks. 

To be fair, I have never agreed with the FCA’s default position on pension transfers; that advice to transfer a pension, often from an employer scheme to some type of personal pension, is inherently unsuitable. This was based on financial advice given in an era when few people transferred and most were recommended to rely on their existing final salary scheme. That has all changed due partly to the pension freedoms but also to the changing shape of the pension sector and the slow death of final salary schemes.

Today, there are many reasons why someone would want to transfer a pension and it is up to the client and their financial adviser to have a comprehensive and detailed conversation about the risks and benefits. We are moving in to an era where pension transfer reviews may become standard practice, not the exception, and that requires careful consideration.

Today, there are many reasons why someone would want to transfer a pension

Pension transfers are complex and inherently risky but they are exactly why we have financial advisers. They need expert handling. The questions here are about much more than pension transfers though.  

It is no surprise many providers would love to see pension transfers become the norm. I understand many fund managers also see the ‘wall of money’ to be released by pension transfers as a potential gold mine although the FCA’s latest recommendations on ‘all-in’ fund fees and better disclosure for investors may cause second thoughts. 

What worries me most is that the huge sums which can be involved in transfers are inevitably attracting the wrong sort of interest from the pension bandits who think that pension transfers are Christmas come early. The pension bandits are watching all this pension liberalisation potential increase in DB pension transfers and licking their lips in anticipation. 

So what’s fuelling all the interest? A major factor is that transfer values have soared off the scale. Given this the FCA is moving, I suspect pre-emptively, to cut off the pension bandits at the pass. If it goes ahead with its plans, and consultation runs until 21 September, out will go the assumption that pension transfers are “unsuitable” and in will come a tougher set of rules.

The FCA’s proposals would also see the replacement of the current transfer value analysis requirement (TVA) with a comparison showing the value of the benefits being given up. There will also be a rule requiring advice to be provided as a personal recommendation and guidance on the role of a pension transfer specialist.

The modernisation of some quite dated rules is long overdue but there’s a fly in the ointment. Speaking at The Great Pensions Transfer debate conference very recently former FCA technical specialist Rory Percival said that half of advisers were using contingent charging for DB transfers. In other words, their fee is only paid when the transfer goes ahead. This looks to me like a potential inducement for an adviser to recommend a pension transfer and I am surprised it is still allowed. I am sure few professional advisers would recommend a transfer without very good reason but an unscrupulous one could.

Mr Percival, a chartered financial planner, said at the Great Pension Transfer Debate: “If you operate on this basis at the moment, I seriously suggest you move to a non-contingent charging basis. I think in the long run, the sector should move to non-contingent charging anyway.” 

Mike Morrison, head of platform technical at AJ Bell, made the very wise point that it was equally problematic to rely on old advice that a transfer was unsuitable when it may be just what the client needed.

So what next? It is clear that with the volume of pension transfers likely to rise substantially in coming years the regulator needs to modernise advice and help advisers stick to their fiduciary duties and avoid ethical conflicts.

It is also clear that the industry needs better training on pension transfers and the modelling of financial outcomes needs to be much clearer and more robust so that clients can make an informed choice.

It is too easy to forget that while the industry is debating the pros and cons of transfer advice it is paramount that clients come first. They will rely on their pension for income for 40 years or more. Consumer safeguards should come way above any issues around advice. Certainly it is difficult to see where contingent charging fits in to all this and closer scrutiny of pension transfers would be no bad thing.

Kevin O’Donnell is a financial writer and journalist