James Coney 

Pension freedoms' unintended consequences

James Coney

James Coney

A combination of the pension freedoms and rising values on defined benefit transfer values was always going to lead to a surge in people seeking to ditch their final salary schemes.

I know plenty of pension trustees who were having open conversations about moving out of the schemes they were helping to oversee.

In 2017, £36.8bn was withdrawn from pension schemes – a startling rise on previous years.

It would be wrong to blame advisers for this. Pension schemes are equally responsible, offering such generous terms that their members could hardly resist taking the cash.

Generally, the transfers seem to have been working well – not least because of the great level of diligence most advisers have to shoulder.

But then along came British Steel, which deeply tainted everything. The work of the majority once more became tarnished by a handful of rogues.

The shadow of this debacle hangs over the Financial Conduct Authority's (FCA’s) review of DB transfers.

Its recommendations seem to develop a well-measured approach to advice on transfers (though I have little doubt they represent another headache in terms of compliance).

What this means, though, is that the FCA has been accused of pulling its punches, particularly in failing to ban contingent fees. The MP Frank Field, in particular, was angry that they were not banned.

The FCA seems caught between believing that contingent fees are the Devil’s work, and wanting to ensure everyone has access to advice.

We’ll see how this plays out. My gut feeling, based on the rhetoric from the increasingly light-touch FCA which is all about outcomes, is that contingent charging will remain. If that happens then transparency will be everything.

What strikes me though is that the FCA’s work seems to have a number of missing links. It’s very concerned about accessibility of advice, but seems to be blind to the ludicrously high excesses advisers face on their PI cover for undertaking pension transfer advice.

Not only are these restricting the market, but they are putting up the cost of advice. For example, last week I met someone who told me the excess on the PI cover for doing this work was close to £100,000.

And there are many other questions to be answered about the FCA’s work. Are they overstating the value of an annuity in today’s money? Certainly the valuation of DB schemes is way out of kilter with the reality of the money markets.

And why are pension schemes offering transfer values that are lower than the assumptions the FCA is working with?

There seems to be a chronic misalignment. One reason is that the rules for financial advisers are governed by one regulator, and the behaviour of the pension schemes by another.

But there is a great need for the pensions and financial regulators to see eye-to-eye.