There is no doubt that the pension transfer market is set to grow dramatically. The exodus from defined-benefit schemes seems likely to accelerate as a result of longevity trends and new accounting rules. In addition, within life companies, according to figures from Cazalet Consulting, pension transfer business grew from 24bn in 2004 to over 33bn in 2005 – albeit this includes “recycled” business and internal transfers.
Given the above, it is easy to arrive at an estimate in excess of 250bn as the total funds at stake over the next four or five years just in respect of pension transfers. It is hardly surprising, therefore, that this sector of the market is attracting so much attention from providers, advisers and other commentators.
It is against this backcloth that I made my comments about moving advice in this area on to a wholly fee-remunerated basis. Just to be clear, I was not suggesting that advisers should not be remunerated for advice on pension transfers. Rather, I was suggesting that the current commission structure for this type of advice is unhealthy and unhelpful.
The advantages of consolidating legacy pension assets under one wrapper such as a Sipp are clear. For those in doubt, I would refer you to an excellent article in Money Marketing just a few weeks ago.
Historically, most Sipp business has been established on a fee basis primarily because the majority of providers not being insurance companies did not operate with a commission-paying mentality. Advisers have generally been remunerated through either a fee deduction facility or through a separate payment outside the fund.
This contrasts with the typical life company commission-paying structure. With the growth in Sipp business, particularly via life company providers, I suggest now is the time for an overhaul in the method of adviser remuneration.
A big proportion of Sipp business is funded at least in part by transfer payments. In a recent survey, the proportion of Sipp new business arising from transfer values exceeded 65 per cent. Some of this will be genuinely new money from occupational schemes although, of course, this is not new pension savings. The rest will be recycled funds from legacy products either from within the provider’s own book or from other providers.
Differing levels of advice are needed in this context. There is a world of difference between advising on a complex transfer from a defined-benefit scheme and advising on a transfer which represents nothing more than placing the savings in a new wrapper – such as a Sipp – with the same provider. It is entirely appropriate that the adviser remuneration reflects the differing scope of advice. The typical commission structure will not do this. Moreover, account needs also to be taken of the size of funds involved, which frequently in a Sipp will be six figures.
All this suggests that perpetuating a commission-paying structure in this environment is unhelpful. It certainly is inconsistent with transparency which has been one of the great attributes of Sipps. The FSA have just announced that they will be looking at the impact of incentives as part of their review of retail distribution. They specifically highlight three potential sources of detriment in commission-based selling: product bias, provider bias and churn. Commission payments on transfer business must surely increase the likelihood of detriment in all three areas.
I repeat that I am not saying that advisers should not be remunerated for advising on pension transfers, including transfers to Sipps. However, I am saying that commission-based transfer advice increases the risks of consumer detriment and is hard to justify. Perhaps now is the time to consider introducing a code of practice for all providers on pension transfers – which would disallow “hidden” commission and might also be usefully extended to cover the administration of transfers where in some cases the delays in processing are just as damaging.
John Moret is director of sales and marketing at Suffolk Life