Defined BenefitJan 24 2018

The FCA has pension transfer changes in sight

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The FCA has pension transfer changes in sight

The Financial Conduct Authority's announcement that it is poised to investigate firms holding defined benefit (DB) transfer permission has stirred the market recently.

The regulator’s actions – triggered by the British Steel pension crisis – are very telling as it hammers home even harder how concerned it is about DB transfers.

The news of the probe also comes ahead of plans by the FCA to publish its guidance on DB transfers before the end of March.

Advice charges

According to pension commentators, the issue of advisers accepting contingent fees for transfers should be high on its list of issues to look at.

It is debatable how far the regulator can go to control charging before it is accused of being a pricing regulator. Typically, advisers will charge anywhere between £1,000 and £3,000 to give advice on a DB transfer or if they are using the percentage model, they might charge 1.5 per cent at the lower end and 3 per cent at the top. 

However, there have been, and continue to be, examples of advisers charging questionable fees.

Sources who asked to remain anonymous told Financial Adviser of multiple examples where transfer advice costed £10,000 or more – much higher than the typical advice charge on an average-sized pot. 

In a note last year, Platforum said it was told of a case where a client was charged £30,000 on a fund with a transfer value of £250,000 – with the assets then invested in an obscure fund. The flip side is that fixed fee models could deter some advice seekers.

Phil Brown, head of policy at LV, said: “The FCA has stated that contingent charging for DB transfer advice could raise concerns about conflicts of interest if appropriate controls aren’t in place.

“Many in the industry see non-contingent charging for DB to defined contribution (DC) transfer advice as good practice, but we know that there are some advisers who will still use contingent charging models.

“At LV= we believe non-contingent charging is more appropriate for this type of advice and would welcome greater discussion of this issue across the industry.”

Key Points

  • Concerns exist over contingent charging on DB transfers.
  • Some experts suggest that banks and large providers could fill the gap for those with less than £30,000.
  • Changes need to be made as to how all parties approach DB to DC transfers.

Andy Sutherland, managing director of advisory services at compliance firm TCC, said: “I’d be surprised if FCA ban contingent pricing, because it is a complex and difficult issue to address.

“Contingent pricing on transfer advice, represents a significant conflict between the adviser’s interest and the interest of the client and we are aware of a number of advisers who have banned it themselves.”

Advice gap

Another issue is that DB transfer advice is not available to everyone.

Very few advisers see pension pots with less than £30,000 as viable, putting savers at risk, as they may end up taking advice from friends or family, or even self-advising.

John Lawson, financial research head at Aviva, said: “It is a gap that is not served and I do empathise with those customers, who maybe feel frustrated that they cannot do anything.

“At Aviva, we won’t take a customer who has not received advice. If a customer who has got less than £30,000 in a DB scheme wants to transfer to us without advice we won’t take the transfer value.

“That’s because people are self-advising in a complex area and £30,000 could be a lot of money to them and more than likely they may have got the advice wrong and we might end up with financial and reputational risk.”

This issue, according to some pension experts, creates an opportunity for large banks and providers to fill a gap by offering some sort of online service, which they might be better placed to do because of their economies of scale. Mr Brown said: “The requirement to take advice if a pension pot is worth more than £30,000 ensures a level of protection for consumers, however those below this level lack the support they need to make the right decision.

“[We] welcomed the Work and Pensions committee’s recommendations on default guidance at the point of retirement. This is something we have long called for, arguing that consumers need a shove, not a nudge, to ensure they have support to get the most from their hard-earned savings.

“If this recommendation was introduced alongside strong action to increase the numbers taking advice, many more people would be able to get the right outcomes at retirement.”

Driving behaviour

The way information is presented to the client during the DB transfer process is also driving the wrong behaviour.

Mr Brown wants the FCA to go beyond just changing how transfer values are presented visually on paper, to looking at the sequence of the advice process and how conversations about transfers are framed with consumers.

He added: “There is a very real possibility that if someone sees their transfer value before hearing the risks, they will be unduly swayed by the big number and will pay less attention to what they would be foregoing.

“We believe all the risks of transferring should be fully presented at the start of the conversation so that when a member sees their transfer value they are more informed and can better understand what they would be giving up.

“This means a change in behaviour at trustee level, as well as adviser, and both the FCA and The Pensions Regulator will need to be in agreement on the best approach.”

The lack of a joined-up approach between the adviser and the transfer specialist also means that information is falling through the cracks and customers are at risk of not being advised properly.

Mr Lawson said: “You really have to view it as one piece of advice. What the IFA should be saying to the transfer specialist is once you have done the transfer value analysis service (TVAS) report, let’s spend an hour or half and hour discussing that and whether that matches the client’s attitude to risk.

“[The IFA] might go back to the client after the TVAS is done to say, the yield you would need to achieve, means you might need to invest in really high-risk stuff, which is beyond your attitude your risk and capacity for loss.”

Mr Brown added: “It is critical that the information used to prepare a TVAS report is appropriate for the transaction taking place and if there are any changes to the solution being provided then the analysis should be redone.

“For this reason, if a transfer specialist is used by an adviser, it is crucial the transfer specialist sees the transaction that takes place matches the report they prepared.”

While the industry awaits the publication of the FCA’s guidance paper, what is clear is that if anyone thought the regulator was going to go soft on DB transfers this year, they were clearly mistaken.

Ima Jackson-Obot is a features writer of Financial Adviser