Defined BenefitFeb 12 2019

Three ways to fix contingent charging problem

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Three ways to fix contingent charging problem

As the debate about contingent charging heats up, pension providers and financial advisers have proposed three alternatives they believe will make pension transfers safer for consumers.

After a consultation from the Financial Conduct Authority (FCA) on the topic last year, the contingent charging debate has made a come-back, as the Work and Pensions select committee launched an inquiry into charging structures for financial advice on DB transfers in January.

The industry seems to be divided on this topic - with firms like LEBC supporting a ban and the Personal Finance Society recently making a U-turn on their position on the matter to turn against a ban.

Now a number of experts have come with solutions they believe could solve the problem.

Sir Steve Webb, former pensions minister and director of policy at Royal London, said one alternative could be to fund transfer advice with a debit from the member’s rights under the DB scheme.

He said: "DB schemes are already familiar with applying pension debits, for example in the case of ‘scheme pays’ for pension tax charges or in the case of pension sharing on divorce."

By way of example, a person who's cash equivalent transfer value is £200,000 and where the cost of providing advice is £4,000, if the transfer went ahead, the member would receive a transfer of £196,000 and the advice cost would have been covered.  

But if the transfer did not go ahead, the member would simply receive 2 per cent less in DB benefits when he/she retired.

"This is unlikely to make a material difference to their standard of living in retirement but would allow more people to access transfer advice," Sir Steve said.

Kay Ingram, director of public policy at national IFA firm LEBC, explained this feature was already used where annual and lifetime allowance excess accrual is used to pay the HM Revenue & Custom recovery charge.

She said: "It is mandatory for schemes to offer this where the tax bill is £2000 or more. The member’s benefits are then actuarially adjusted.

"So scheme administrators already have a process in place which could be adapted to pay advice charges where the member requests this."

Nathan Long, senior analyst at Hargreaves Lansdown, agreed this could be a credible alternative to contingent charging.

However, he warned the "admin hurdles and penal rates that income is given up in return for cash from DB schemes make any introduction challenging".

He added: "Overall the key remains to reinforce the message that these kind of transfers are rarely in members’ best interests."

Another solution proposed by Ms Ingram – who is in favour of a contingent charging ban – is to make the advice allowance mandatory for providers.

The allowance, which came into being in April 2017 following a recommendation in the Financial Advice Market Review, allows pension scheme members to withdraw £500 a year tax-free, up to three times in their life, to pay for financial advice.

Ms Ingram said: "Few providers facilitate this. I would like to see all pension providers facilitate this, and for those who offer flexible drawdown for it to be mandatory.

"Giving people flexible choices which require them to take more responsibility without also giving them a means of accessing professional advice is unfair.

"Not offering pensions advice allowance can lead to consumers being too dependent on guidance from their provider. This presents obvious conflicts of interest and less protection for the consumer."

However, the FCA has recently claimed access to the pension advice allowance was "prominently advertised" in correspondence sent to consumers approaching retirement.

The Pensions Advisory Service (Tpas), which is now part of the new Single Financial Guidance Body (SFGB), has also defended a ban on contingent charging.

In its submission to the committee inquiry, Tpas stated that one way to help consumers would be for the government to introduce default guidance at the point a cash equivalent transfer value was requested by a scheme member.

This "could help strengthen the integrity and efficiency of the process, by making customers more informed and reducing the number of cases that go on to advice," it stated.

Financial advice firm Intelligent Pensions stated these government-backed guidance bodies were "good initiatives but underused and many people are still unaware of their existence".

In its submission, officials at the firm said: "This is one area where government can really help by continuing to promote free and impartial guidance, as they did initially with the Money Advice Service.

"Guidance services cannot offer advice (and should not have this term in their title), but they can offer balanced information which would help the consumer to understand the cost of advice and the consequences of giving up guaranteed benefits."

maria.espadinha@ft.com