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Churn of the screw

A-Day is widely and rightly being touted as an opportunity to restructure clients’ pension arrangements but with the opportunity to transfer comes the opp-ortunity to churn.

The numerous changes to the pension rules from next April mean many people will undoubtedly be better served in different contracts after A-Day.

The only concern is that switching may be more blanket rather than tailored for individual clients. All this against a backdrop of once again rising commission is resulting in murmurings of “not again”, with memories lingering of the last great pension misselling scandal of the late1980s.

Looking at the current situation, on top of the ironic complexity of pension simp-lification, in one corner we have providers heavily marketing their revised offerings. We have seen most providers revamp their section 32s, Sipps and personal pension offerings with commission hikes on a number of contracts.

In the opposite corner, the FSA has been vocal in reminding advisers of the need to ensure all transfers are justifiable and has warned it will be closely watching all transfer business, particularly into section 32s.

In the regulator’s latest Life Insurance Newsletter, FSA insurance sector leader David Strachan says: “Various press articles have described a number of potentially difficult advice areas and we have identified others where there are risks of poor-quality advice being given – transfers to S32 contracts and the need to preserve levels of tax-free cash; and the need to avoid unnec-essary switches from occupational pension schemes or group personal pensions into new comm-ission-bearing schemes.”

Overarching all of this is advisers’ very real need to ensure their clients are best positioned for A-Day, such as in a contract that can preserve any tax-free cash rights over 25 per cent which will otherwise be lost after next April.

Standard Life marketing technical manager John Lawson lit the blue touch paper last week by saying that Scottish Equitable pensions development director Stewart Ritchie risked encouraging churning by promoting section 32s so heavily.

Given the history of the industry, churning is not an accusation to be made lightly and Ritchie robustly defends all he has said or written and few would question the integrity of one of the most respected pensions commentators.

Norwich Union compliance director Ian Glenn says there are definitely parallels between the current situation and the last misselling scandal.

He does, however, believe much of the risks are due to the complexity of the situation rather than plain commission hunting.

Syndaxi Financial Planning director Robert Reid agrees and he has more vivid recollections of the last pension misselling crisis in the 1980s than most, having trained many of the PIA staff who carried out the subsequent review.

He says there will always be rogue elements in the IFA community that will churn for commission but the greatest danger facing the industry is the knowledge gap on A-Day.

Reid says: “I have seen more garbage trotted out in the last few months than I have in the past 20 years. I know the rules keep changing but the level of knowledge on pensions simplification is terrible. I think you can draw parallels with pension misselling. Commission levels are creeping up and there is a definite whiff of deja vu in the air but more because a lot of people are advising on a complex area without detailed knowledge.”

He says the G60 qualification should be a bare minimum for advisers advising on pensions and anyone who has not completed the CII’s CF9 pensions simplification exam should not be allowed anywhere near clients’ retirement portfolios.

Glenn agrees that the two qualifications should be seen as a bare minimum. From a provider perspective, he says, the risk of being accused of encouraging churning is very much at the forefront of their thinking in their pensions promotion right now.

Glenn says: “We would not be part of blanket prom-otion, if there is such a thing, and we will not allow our broker consultants to advise IFAs on pension transfers because of the regulatory risk. The worry is we have been down this route before and though it is complicated, it is easy to envisage miss-elling claims after A-Day.”

Lawson says to prevent this, advisers need to do their own research and not rely on pension comm-entators who may have a product agenda behind their advice. Reid also believes advisers should not rely on the life offices because knowledgeable as many of them are, it is the adviser who will carry the can should any problem arise.

IFG financial planning strategist Donna Bradshaw says: “If there is misselling, it will be on a smaller scale and by unscrupulous or gullible IFAs who will listen to the so-called gurus and believe whatever they have seen or heard and see it as a good sales opportunity.”

The key difference she sees from the last misselling crisis is the robustness of industry compliance standards and significantly, the lack of Government sponsorship of switching.

Difficulties will undoubtedly arise and there are likely to be problems further down the line. For example, if a client is trans-ferred into a section 32 to preserve tax-free cash rights, what happens if further down the line they want to self-invest. To transfer into a Sipp would cost them the tax-free cash entitlement over 25 per cent they were originally seeking to protect.

Worse still, the fear of transfer log jams straining provider systems early next year means many life offices are encouraging advisers to carry out their transfers early, yet new and revamped products are constantly coming to market, so there is an opportunity cost here.

Adviser record keeping will need to be clinical and the complexities explained to clients in full. Reid says advisers should not be embarrassed to refer clients with more complicated situations to experts, possibly on a profit-share basis. After all 25 per cent of something is better than 100 per cent of a misselling claim.

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