15 June 2020
In recent years many financial advisers advising on DB pension transfers have operated using a contingent charging model.
The FCA have announced that following lengthy consultation such charging structures will be banned from 1 October 2020. These new rules are set to have a significant impact on the financial advice market and make it harder for individuals to find good quality affordable financial advice. It seems to me that the trend will continue for schemes to make available an appropriate and vetted IFA who has agreed affordable fees to members.
The practice of contingent charging has meant that 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% fees of £10,000 are not untypical.
Once the ban is implemented the FCA estimate that those financial advisers that remain in the market are likely to be charging fees in the region of £3,000-£3,500 for this advice. Some respondents to the consultation noted that this figure was underestimated, and I expect costs to rise further partly due to increased professional indemnity costs. However, IFAs that are appointed by schemes are typically able to charge a lot less per case, because of the up-front investment of the trustees and employer to get the IFA up-to-speed with the detail and to build efficient processes.
In the absence of a scheme appointed IFA, 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 or more 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 seems likely only those members who are particularly keen to transfer, think that they are likely to be suitable and who have sufficient disposable cash to pay the fees, will take up advice.
As a result of these regulatory changes, it therefore seems to me that some members for whom a transfer might be suitable will lose out. But just as importantly, members generally will find it difficult to access advice about how and when to access their DB pension and therefore will be at increased risk of making suboptimal decisions, which could cost them £10,000s in many cases.
The FCA acknowledge fewer members will take up advice and some members will therefore lose out but don’t appear concerned as they consider most of these members will not be materially harmed by remaining in their DB scheme. The FCA also recognise a possible increase in insistent clients who have received a recommendation not to transfer but having paid their advice fee want to transfer anyway. I agree this is a concern. The FCA are also implementing a new regulatory option called ‘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 is not permitted 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 will 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. In my view, abridged advice will be at risk of misadvising people and should be treated with caution.
Separately the FCA have also urged consumers who have transferred previously, including specifically writing to the 7,700 British Steel Pension Scheme members, to check the quality of advice they received and if they have concerns to complain to their advice firm or the Financial Ombudsman Service. We expect this could result in a significant number of claims particularly where the value of funds has fallen since a member transferred. This could lead to further increases in professional indemnity costs for the remaining firms, with some being forced to leave the market. This could cause advice costs to rise further, making even harder for members to find an adviser.
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.
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 to build efficient processes and then c£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. These firms have been operating on a non-contingent fee basis for many years, and conflicts of interest are reduced further as those transfers that do proceed generally do not get invested in the financial adviser’s own managed funds.
Given the expected impact of the FCA’s new rules on the availability and affordability of financial advice, and continuing 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.