Pensions have always been complicated. However, they became even more complicated in April 2015 with the introduction of George Osborne’s freedom and choice regime.
In theory, the increased choice that this introduced is great for members. It means they can access their pension, which is fundamentally their money, in a way that suits them. Some can buy that Lamborghini, if that is what they really want to do.
However, this increased choice is only valuable if members understand the options.
Otherwise, these choices can be overwhelming and result in members making poor decisions.
Unfortunately, most people in the UK are not confident enough to choose the right option – the Financial Conduct Authority’s Financial Lives survey from June 2018 showed that only 27 per cent of people felt confident in choosing the appropriate pension product.
Key points
- The FCA has said it wants to ban contingent charging on DB transfers except for a few exceptional cases
- The decision might drive good financial advisers out of the industry
- It might also prevent people from taking advice in the first place
Thankfully, there are professional companies available to help people who are not confident in making the right decision.
Since the introduction of freedom and choice, 234,951 members of defined benefit pension schemes have employed an independent financial adviser to help them decide whether to transfer their benefits.
These advisers play a crucial role in making sure members make the right decision for them.
As a result, most pension scheme trustees suggest their members get help from an IFA before making decisions.
Many trustees use the Unbiased.co.uk website as a way of supporting their members in finding an adviser. But how unbiased is the advice that members get?
Conflicts
Being unbiased means having the ability to judge fairly because you are not influenced by your own opinions.
It is no surprise that industry commentators and regulators have actively questioned whether it is appropriate to have advisers whose remuneration is directly influenced by the advice they give.
In other parts of our life, perhaps where we are more confident in our decisions, we adjust our behaviour to compensate for these conflicts.
For example, when you go to a car showroom, very few people would ask the salesman whether they should buy the car as they know the salesman is conflicted.
The FCA’s current focus on such contingent charging by financial advisers is intertwined with its disappointment with the large number of recommended DB transfers since freedom and choice.
It will therefore be impossible to address the quality around DB transfer advice across the industry without tackling the issue of contingent charging.
What is proposed in the FCA consultation?
So, on July 30, the FCA published a consultation paper proposing, among other things, a ban on contingent charging.
It said: “We are concerned that too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging creates an obvious conflict. This is where advisers only get paid if a transfer proceeds.”
The proposals are to ban contingent charging for advice relating to almost all transfer cases being considered.
