As the debate on contingent charging opens up wider questions about IFA business models, I would like to suggest a different way transfer advice should be paid for.
The numbers on cash equivalent transfer values (CETVs) are simply huge. Office for National Statistics provisional figures show £34.3 billion left defined benefit (DB) schemes through CETV in 2017. This is nearly triple the 2016 figure and three times the amount de-risked by trustees through buy-ins, buy-outs and longevity swaps. CETVs are up sevenfold on 2014 levels.
The financial results of Old Mutual Wealth, St James’s Place, Prudential and Royal London have revealed a surge in pensions business. Old Mutual reported 20% of new pension premiums in 2017 were from one-off DB transfers.
Last week in New Model Adviser®, I said both the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) had been caught out by this surge. Famously Megan Butler, the regulator’s executive director of supervision, was unprepared for the interrogation she got from Frank Field when the FCA gave evidence to the work and pensions committee.
Field was equally cutting to British Steel Pension Scheme (BSPS) chair, Allan Johnston, who he described as being in ‘another country’ to his members.
A contact at a major scheme said TPR expressed surprise at Barclays Bank, which reported a £4.2 billion transfer of assets from its staff pension scheme.
It would be wrong to say nobody saw this coming. IFAs saw CETVs rising as a result of falling gilt yields and increased life expectancy.
This trend peaked following the announcement of the Brexit referendum and has plateaued since. In response to rising consumer demand for ‘pots’ rather than ‘pensions’, IFAs have found ways to increase capacity and ease the friction of high upfront fees.
By increasing numbers of pension transfer specialists, using improved software and adopting contingent pricing structures, IFAs have met the demands of a new ‘pensions mass-affluent’.
For most people, the attraction of a large pot of inheritable wealth with a relatively low target return needed to match forsaken guarantees is compelling. But the new pension affluent are as likely to be steelworkers or bank cashiers as investment gurus.
The products designed for wealth management appear beyond the financial capability of this new class of investor. The FCA has suggested more than half of the cases it has sampled have not passed its suitability test.
The regulator’s about-turn on neutrality in consultation CP17/16, and the proposed measures to ban contingent charging (CP18/7), suggest the FCA is wary of what it calls commoditised advice. It is concerned about inappropriate solutions and keen to return to a time when a pension meant a wage for life.
To understand this attitude, you need to look to the public policy agenda. Look back before the introduction of the pension freedoms to the original reasons for the tax incentivisation afforded to approved pensions.
The grant of tax relief on contributions and investment growth was a reward for insuring against living too long, not to boost inheritable wealth. The Treasury’s impact assessment in 2014 concluded there would be no increase in pension transfers in the years that followed. That the exact opposite has happened will be of acute embarrassment, not just to the FCA but its paymasters.
So it is unlikely Big Government will be sympathetic to arguments from the Personal Finance Society that professional indemnity (PI) insurers are preventing the exercise of the pension freedoms. PI insurers are as uncomfortable with the risks of transfer as the FCA.
We need to provide mass market advice on transfers to the large numbers who have DB pension rights but cannot or will not pay up front for transfer advice. Rather than insisting on the retention of contingent pricing (a practice inevitably confused with the taking of commission) advisers should focus on satisfying a key policy deficiency of the pension freedoms. This is the delivery of pure advice, paid for not out of the proceeds of transfer, but by the DB scheme.
DB pension administrators are used to capturing and highlighting a number of charges against a future pension. This includes tax paid on the member’s behalf (where annual and lifetime allowances are exceeded) and divorce settlements.
There is no practical reason why pensions advice on DB cannot be added to the scheme’s pay roster.
This policy would ensure a transparent charge could be made for all transfer advice. And that charge would be fully recoverable, whether advice went ahead of not.
This would mitigate conflict risks, while meeting the FCA’s policy intent to promote financial advice at retirement.
To totally eliminate conflicts, I have argued firms offering transfer advice cannot financially benefit from the proceeds of the transfer. This system of conflict management is the basis of conflict practices in most professional practices.
One further conflict remains: the product into which money is transferred. I have been shocked to find advisers ignoring a client’s workplace pension plan as a wealth accumulation vehicle.
In my view the workplace pension, where available, is the obvious vehicle into which a CETV can be invested.
Advisers with a long memory will remember the RU64 interlude, under which advisers needed to justify not using a low-cost product. I see this regime returning, to curb the use of inappropriate structures (Sipps and Qrops) for clients without the financial capability to benefit from their features.
I also suggest pension transfer specialists make their recommendations conditional on the client using a workplace pension as the default pension to which money is transferred. This is unless there is clear evidence a workplace pension is not suitable. Such a position would not only give comfort to the FCA, but the PI insurer too.
Above all, it should give comfort to both client and adviser.
I am not suggesting esoteric pension products should not be considered, or indeed used. But ‘don’t ignore the workplace pension’ is a slogan that needs wider and continued circulation.
Henry Tapper is founding editor of Pension PlayPen.