There is a growing sense of foreboding among advisers and providers that advice on defined benefit transfers is building up problems for the future.
Aegon chief executive Adrian Grace is the latest to join the clamour for more regulatory clarity on DB transfers, though not all advisers are convinced more guidance from the FCA is warranted.
Advisers are now starting to mobilise among themselves to ensure they stay informed and to glean best practice from their peers.
Providers have also pointed to a dysfunctional market, with consumers failing to get the DB transfer advice they need.
Money Marketing has examined how the DB transfer market is evolving, the industry’s concerns and whether the regulator has been clear enough in its expectations of advisers.
A question of clarity
Aegon pensions director Steven Cameron says the market is not working for consumers who are considering transferring out of their DB scheme.
He says: “Part of the FCA’s mission is to ensure markets function well, consumers are protected and to promote efficient competition. When we look at the DB transfer market, this is clearly not happening.
“Demand for advice on DB transfers is exceeding supply by quite some margin. People clearly want advice on this issue but cannot access it.”
Echelon Wealthcare principal Al Rush has organised a free conference for advisers, which will be held in Peterborough next month.
He says: “There is clearly a lot of concern around this area. Originally we had the idea of getting a few advisers round a table, but it snowballed from there. We’ve now already got almost 200 people attending. It will be an opportunity to hear from leading practitioners in this field – including former pension ministers and providers – and allow advisers to share their concerns and best practices.”
Rush says he would welcome clearer guidance from the FCA on DB transfers, as many “conscientious and diligent” advisers are wary of the consequences of giving advice on this issue. He says: “There is no future-proofing.”
He says he would like to see a clearer picture “about what good advice looks like” for those looking to switch from DB to defined contribution pensions.
Deep in thought
The FCA is expected to launch a consultation on DB transfers within the next few months.
Cameron says: “Hopefully advisers will engage with this process, so we can come to some agreement about what the advice process should involve when advising on DB transfers.”
There are a number of specific areas which he hopes this consultation paper will address.
He says: “The FCA has said advisers shouldn’t solely rely on critical
yield figures when making transfer recommendations. But we need greater clarity and a common understanding of what other factors should be taken into account, and how they should be used in this analysis.”
Cameron argues this would give advisers more confidence that the recommendations they make today are not going to be subject to future complaints or misselling issues.
He adds: “Ultimately it should also benefit consumers who should find it easier to access robust and consistent advice on this complex area.”
But not everyone agrees the rules surrounding DB transfers are not fit for purpose.
Red Circle Financial Planning director Darren Cook says: “The current guidance is very clear. The FCA states advisers should assume a transfer is unlikely to be in the client’s interest. You should only recommend a transfer if you can make a clear case otherwise. This doesn’t seem to contain too many grey areas.”
Informed Choice managing director Martin Bamford says: “We are not opposed to more guidance, or more detailed guidance on this issue.
But as far as we are concerned the guidance as it stands is fairly clear. We don’t think further clarification is necessary.”
Wingate Financial Planning director Alistair Cunningham says: “The current criticism of FCA guidelines isn’t coming from firms like ours. We take a low-risk approach to DB transfers, and will start on the assumption that it is rarely in the client’s interest.
“There is a widespread perception that things have changed since the introduction of pension freedom rules, but I am not sure I entirely agree.”
Cunningham says the “broad and overarching approach” adopted by the FCA – which focuses on critical yield figures – seems “entirely sensible”.
Cunningham is against any regulatory change that effectively makes it easier for advisers to recommend a DB transfer.
He says: “Why are people pushing for the FCA to change its stance on pension transfers? Is this really about clarity? Or is it about changing rules to make it easier to recommend DB pension transfers?”
But providers and advisers agree the surge in demand for advice on DB transfers in the last few years has created challenges for the industry.
This was originally prompted by pension freedoms, but has been exacerbated by the downturn in gilt yields last year following the Brexit vote. This led to many pension scheme revaluations and a subsequent increase to transfer values.
With demand for advice on DB schemes outstripping supply this has clearly had an inflationary effect on advisory fees.
Many in the advice sector agree fees have been on an upward spiral. At Informed Choice, for example, they charge a fixed project fee for DB transfer advice.
This is now a minimum of £2,500, up from £1,500 to £2,000 two years ago. Charges are higher for more complex cases.
Bamford says: “This is because demand has increased, the values involved are bigger reflecting the fact that these are more complex cases, with more risk involved.”
Rush says he charges a fixed fee of £1,350 for pension transfers, which has not increased in recent years.
But he says: “It’s certainly my impression that fees have risen across the industry. Given the complications involved, and demand, it seems legitimate for advisers to charge more for their services.
“Many people are aware they have significant choices to make at retirement and are happy to pay for this advice. Most advisers are also in the fortunate position of being able to pick and choose more affluent clients.”
A fee fudge?
Echelon Wealthcare also charge fixed fees to review transfer options, regardless of whether the eventual recommendation is to stay put or to switch. Some firms are charging on a contingent basis, often a fixed percentage of the transfer value. This has given rise to concerns that such charging models can create conflicts of interest.
Cunningham says: “We need to look at some of these fee structures. With some of these contingent fees the adviser gets nothing if the recommendation is to stay put. But if they recommend a DB transfer they get paid up to 5 per cent of the transfer value.
“There’s got to be a few questions asked about this.”
There are concerns this pent-up demand has also opened the door to less scrupulous providers, who are keen to facilitate such transfers, even if they may not be in the clients’ best interest.
Many unregulated firms are now targeting individuals offering a “free” pensions review, but there has also been a slew of transfer specialists offering their services to the advisory market. Some of these firms are regulated, but others are not.
One recent email seen by Money Marketing offers advisers a “dedi-
cated pension transfer service” with the option of splitting the 5 per cent fee charged on any transferred pension.
Is this really about clarity? Or is it about changing rules to make it easier to recommend DB pension transfers?
The firm clearly highlights many of the regulatory concerns expressed by the advisers, with the introductory email stating: “Although many advisers are qualified to advice on pension transfers, many choose not to, especially in the area of defined benefit transfers.”
The firm claims it will take “full responsibility for our advice and normally hand the client back to you to agree a suitable investment strategy”.
Syndaxi Chartered Financial Planners managing director Robert Reid is concerned about the number of advisers who seem to be outsourcing this pension decision, but then continuing to advise clients on their investments.
He says the regulator has pointed out DB transfer decisions should not be made “in isolation” and that those advising on pension transfers should take into account any investment advice given by a third party. But as the FCA has not specifically ruled out such arrangements, Reid thinks there could be further regulatory clarity on this.
Other issues that may come up in the forthcoming consultation include how to deal with insistent clients.
Bamford says: “One grey area concerns insistent clients. People need to show they have got advice if they want to transfer a DB pension scheme worth more than £30,000. If someone wants to go ahead despite advice to the contrary it isn’t too clear what the procedure is.
“Some advisers are reluctant to sign the relevant piece of paper, showing the client has had advice, as they know they will use this to transfer the funds anyway.
“Many are worried that even though they advised against it they could face consequences at a later date. Similarly what is the ceding scheme’s responsibility if it is clear the customer is expressely acting against the
DB transfers: One client’s perspective
Having just gone through the process of a DB transfer, I can categorically say the process, regulations, guidance and system are all in desperate need of being dragged into the modern world.
I did eventually get the transfer pushed through, but I found the whole thing frustrating and unrealistic.
First of all, it was extremely hard to find an adviser who would take it on. Most were too scared to do so. Of those willing to take it on, the fees, whether as a minimum lump sum or as a percentage, were mind-bogglingly high. I did finally find a good adviser, after about a month, eating into the three-month window on the valuation. He understood my situation immediately – namely, that I am single with no dependents and have a decent alternative pension pot and non-pension portfolio already. Most importantly, he understood I am an experienced investor who appreciates the risks of such a transfer, and that recent fluctuations in gilt yields had increased my transfer value by 60 per cent in 12 months.
The forecasting report was then sub-contracted out to another firm who took an agonising three months to complete the task and sign it off. This took me well beyond the three-month window I had on the valuation. I had to beg and plead for them to review the valuation and extend the window. I was also shocked the valuation work was based purely on annuities. I have no intention of ever taking an annuity so why should the FCA force firms to create comparisons using rigid, historic annuity rates?
The compliance director at my adviser’s company was scared stiff he was about to recommend the transfer, albeit with countless pages of caveats. I effectively had weeks of persuading them via email correspondence that I was of sane mind and knew what I was doing.
In all it has taken just over six months to get the thing done. It is more worrying people without any financial knowledge may be told DB transfers are a bad thing and get scared off – simply because the advice firm dealing with the case is too cautious to suggest otherwise.
With contingent charging, a lot depends on the context. For a sole trader that gets a client walk in with a £500,000 defined benefit transfer, which may be the first case of its kind for six months, they may be mighty keen to get that contingent charge. For some, it would be very difficult for the level of fee not to play on one’s mind. But a bureau service that does 100 DB transfers a quarter would price into their contingent charging model the fact that for so many the suitable option will be to tell them not to transfer. Contingent charging can work well in certain scenarios, with specialist firms doing volume or when clients do not have a huge amount of ready cash to pay non-contingent fees.
You could say it is just hidden commission and just ban it, but that would be a bad move. The FCA is keenly aware these things are not straightforward,and that is why the regulator can seem vague or contradictory on this.
The FCA is slowly learning that what matters is context. In the context of people who take advice because they have to, it is clear they are set on taking benefits out of their DB scheme regardless of the advice given.
Jonathan Purle is director at Purle Consulting