Defined Benefit  

Adviser body backs contingent charging ban

The PFS also argued in its submission that contingent charging “introduces a conflict of interest between the adviser’s professional duty to give balanced advice on a transfer, and the potential revenue from the client that can only be secured by giving ongoing advice on investments after a transfer is made”.

This conflict is then exacerbated by customers being “highly motivated to cash in part of their DB pension” and by some scheme members being “more vulnerable to poor decision-making”, due to low information about the risks of transferring out of the DB pension scheme, it said.

The professional body argued firms could avoid contingent charging, “but nevertheless offer very low advice fees for pension transfer business, that are then subsidised by higher fees for ongoing advice on an investment portfolio that is funded by a pension transfer”.

Introducing a ban on contingent charging will mean that some clients who should not be transferring their DB pension will pay higher fees for a recommendation to stay in their current scheme, the PFS said.

“This is because the conflicts of interest that arise from subsidising clients who stay in the DB schemes with fees from clients who transfer out can only be addressed by removing the cross subsidy,” it added.

For the professional body, the only way to mitigate this is to provide more education to members of pension schemes about the risks of transferring out.

It said: “One way to achieve this is to require pension trustees to take a more active role in educating members of DB pension schemes about the risks of transferring out, in order to discourage individuals who would not benefit from a transfer from approaching an adviser and incurring advice fees unnecessarily.”

Paul Gibson, managing director of Granite Financial Planning, said that his firm operates "an advice, implementation, review charging structure which seems to work perfectly well".

He said: "I am not generally in favour of charging structures being mandated, but I think it would be best practice in the case of final salary transfers, where contingent charging appears to have been abused in some quarters.

"I think the PFS view on this matter is pretty sensible.”