13 September 2019
Currently most financial advisers advising on DB pension transfers operate using a contingent charging model. Advice is initially ‘free’, but charges are deducted from funds if an individual goes ahead and transfers from their DB scheme. With the average transfer value paid now over £400k (see LCP analysis) and advice charges of 2%-3% these fees can typically be £10,000 for many of the 69% of individuals the FCA found to be advised to transfer (and typically no fees for most of the remaining 31%).
The FCA are proposing to remove this obvious conflict of interest by banning these charging structures (except where a member has evidenced shortened life expectancy or is in serious financial hardship).
In our opinion the current world of contingent charging isn’t working and is resulting in significant losses for consumers (the FCA estimate that the harm created by unsuitable DB transfer advice is up to £2bn each year and we agree the loss is of this order). We therefore support the consultation, but I do have concerns that the ban will severely restrict the availability of advisers and number of members taking advice. After all, good advice is a good thing.
After this proposed ban the FCA estimate that those financial advisers that remain in the market are likely to be charging fees in the region of c£3,000 for this advice. If a typical member was considering whether a transfer might be in their interest, it would seem unlikely they would be willing to commit to pay £3,000 unless they were confident a transfer might be suitable (otherwise they might perceive taking advice as paying £3,000 to be told to do nothing). Therefore, it is likely only those members who are particularly keen to transfer, think that they are likely to be suitable and have sufficient disposable cash to pay the fees will generally take up advice. As a result, some members for whom a transfer might be suitable will lose out.
For many members deciding when and in what form to take their DB pension is the biggest financial decision in their lifetime - and this decision isn’t just about whether to transfer or not. Members have a whole range of options within their schemes including usually the option to convert around 25% of their pension into a tax-free cash lump sum on terms that may appear attractive but could in fact be financially unfavourable. It is therefore sensible for members to take good quality and unbiased financial advice before making such important and irreversible decisions.
The FCA are also consulting on the idea of introducing ‘abridged advice’. The idea is that this will act as a filter mechanism to enable advisers to advise a member that a transfer is unlikely to be suitable before they have to pay for full advice. However, the adviser does not have to collect detailed scheme information so will not at that stage be able to advise a member what other options to take from the scheme and may not be aware if the scheme is offering particularly ‘generous’ transfer values, which is when a transfer might be more suitable. A number of advisers have already said they will not offer abridged advice and therefore it remains to be seen if this service will become readily available.
A number of our pension scheme clients have now appointed a specialist financial adviser firm to help their members make better retirement decisions and advise on all their different options including the option to transfer. The firms that have been appointed typically charge a fixed setup cost to get to know the scheme and then less than £1,000 per member who takes advice. Sometimes this cost is paid for by the sponsor or scheme, sometimes by the member or sometimes shared. Not only are these firms operating on a non-contingent fee basis, but conflicts of interest are reduced further as those transfers that do proceed do not get invested in any of the financial adviser’s own funds. Given the likely impact of the FCA’s proposals on availability and affordability of financial advice, and strong industry calls for schemes to take a more active role in supporting their members in good decision making, we can only see this encouraging trend continuing.