The six million people in defined benefit pension schemes who could be enticed by the high transfer values on offer are causing much consternation among parliamentarians, the regulator and financial advisers.
The FCA has found a significant proportion of transfer advice to be unsuitable or questionable. Its latest consultation suggests big changes to the way such transfers operate.
It is most unfortunate that rogue firms, or unqualified, unregulated lead generators, have damaged the reputation of the advice industry. As the FCA rightly acknowledges, advice is a valuable service, but it is also important that quality and professionalism meet expectations.
The work and pensions select committee has called for a ban on contingent charging and the FCA echoes concerns about potential conflicts of interests with business models that rely on transfers in order to ensure profitability.
I have suggested an alternative approach to the FCA – one that increases awareness of the value of advice, while also achieving its aims.
Everyone thinking of transferring should be required to take independent guidance first. This would help advisers who “triage” potential clients by means of generic “advice”. The FCA has warned that this may too easily stray into actual advice. Even deciding against accepting a client could be construed as advice against transferring. By the same token, accepting them might be indicative of a conclusion that the transfer is sensible.
Separating the adviser from such a pre-selection process is much safer.
The government’s new single financial guidance body could play an important role. Explaining basic parameters could help DB scheme members to self-select.
For example, those in very poor health with other guaranteed pensions, who plan to work well beyond pension age, or who want a fund for social care or tax-free legacies, would learn that transferring might suit them. But if they were in good health, had just this one pension and did not like taking investment risk, then they would be deterred from seeking advice.
When better informed, those still wanting professional, qualified, independent advice will better understand why they should pay for it.
I support the FCA proposal that a full report should be produced, justifying a recommendation not to transfer but raising the issue of charging for staying put. We need a system that justifies payment regardless of outcome, plus separate charge fees for carrying out the transfer.
The FCA could investigate allowing DB members to pay for advice out of their DB pension entitlement. Fixed fees or percentage of assets are easily deducted from transfer sums. But if the best advice is not to transfer, a charge could be paid by the scheme in exchange for an appropriate reduction in future pension. The scheme may need to make a small admin charge for this.
The benefits of such an approach would be more members understanding the advantages and disadvantages of transferring, rather than just being lured by the large sums on offer. Meanwhile, advisers are paid for their expert advice without the risk of conflicts or incentives.
If this results in fewer transfers, so be it. But it should still mean those for whom transferring really is the right choice (and there are many) can feel confident in achieving the right outcome.
Ros Altmann is former pensions minister