Contingent charging has come under intense scrutiny from the FCA and the question of whether or not it should be banned has divided the adviser community.
But there is also wide divergence in exactly how models work across firms, how much advisers are charging and when exactly contingent fees are levied.
There are those who argue that, alongside pension freedoms, contingent charging has been the main driver for the astronomic growth in transfers out of defined benefit schemes. First Actuarial director Henry Tapper points to Office for National Statistics data, which shows that, since 2014, before pension freedoms and an upswing in contingent charging, the amount of money being taken out of defined benefit pensions has increased six-fold from £5.4bn a year to £32.4bn in 2017.
Tapper says that advisers are typically charging between 2 and 3 per cent of transfer value in up-front contingent fees. In some of the worst cases, among the British Steel Pensions Scheme members, Tapper says he has seen workers charged up to £12,000.
Tapper says: “That’s too much for an individual to write out as a cheque; they are just not going to do that.”
One IFA he spoke to says he works out his charges on an hourly rate. Carrying out a proper review and pension transfer takes around 30 hours, which at £150 an hour would be £4,500. On top of this there is a charge to cover professional indemnity costs, which have soared as a result of the recent transfer scandals, so this adds another £500, bringing the total advice cost to roughly £5,000 per transfer.
With contingent charging the fee is taken out of the client’s pension pot on completion of the transfer to the new provider. A major advantage for the client is that the charge is free from income tax as it comes directly out of their pension pot before they receive it. It is also free from VAT as it is classed as an implementation charge.
This means the client saves 20 per cent on VAT and up to 45 per cent on income tax. Advisers who go on to manage a client’s pension portfolio will then levy ongoing charges, which can also be seen as contingent on the transfer taking place. These are typically between 1 and 2 per cent, says Tapper.
He says: “I think contingent pricing has been responsible for this massive jacking up of DB transfer volumes. When the FCA looked at DB transfers it found that in 53 per cent of cases there were problems. I support a ban on contingent charging on balance because I think we’ve now got to a point where transfers are happening left, right and centre, and many other people I speak to have no idea what they’re doing because they simply haven’t engaged with the advice.
“They see advisers as gatekeepers to their money, not people with whom they can have a discussion.
“I’ve spent a great deal of time down in Port Talbot with steel workers who have been bamboozled out of their hard-earned savings, and frankly I’m not minded to listen to the apologists for contingent charging, even though some of them are my good friends.”
Tapper believes that while there are disadvantages to banning contingent charging, the pros outweigh the cons. He says: “Although there are a few people who will undoubtedly not get the quality of advice they need, on balance we are better off without contingent charging. We are better off with people paying out for the advice up-front because in the majority of cases people are better off staying in DB pensions. That is the position that the FCA has reverted to.”
But Echelon Wealthcare managing director Al Rush argues that contingent pricing is less of a problem than other DB transfer issues. Rather than charging clients a percentage fee, Rush estimates how many hours a case will take based on its complexity. He says it is not fair to base the charge on the size of the pension pot as a very large pot does not necessarily require that much more work than a small one.
He says: “I have got nothing against contingent charging if it is done properly. I do not think it is the charging structure that is at fault here; I think it is the bad advisers that ruin it for everyone else.
“There are some people out there who genuinely, for whatever reason, do not have access to liquid funds. They might have just paid for a child’s wedding or a medical bill. They could be highly suited to a DB transfer and so in those circumstances contingent charging is not bad.”
Rush says he has seen cases of British Steel workers charged as much as £30,000 for transfers as well as extortionate ongoing management charges. In some instances the workers were in their 40s; Rush says they did not need ongoing advice on their pension portfolio at all but could have just left it in the new workplace scheme.
Rush advocates a two-person sign-off, with two qualified advisers or even a professional body signing off on any DB transfer. He says: “For DB transfers you can’t put toothpaste back in the tube. Once it is done it is irrevocable, so I am a firm believer that there is a higher threshold of responsibility than putting somebody into a £20-a-month life insurance policy.”
Red Circle chartered financial planner Darren Cooke agrees that contingent charging should remain. He says: “Contingent charging is not the problem; greed is the problem. I think it is about improving the standards in the profession. We have got to find a way of making sure advisers do the right thing for the client rather than for their own pocket.”