New FCA findings suggest advisers should prepare for significantly higher FSCS contributions at least
Like many adults in the latter half of their lives, my pecuniary affairs are complicated. Not only do I earn a living from multiple employers but my future retirement income is dependent on several sources of funding, which includes three separate defined benefit schemes.
The three schemes all have different retirement dates and accrual rates, not to mention varying levels of life insurance. I keep wondering what I should do about them; whether the cash equivalent transfer value would make it worthwhile to switch to a defined contribution scheme instead.
I ought to ask an expert – except that, it would seem, you cannot trust financial advisers to give you unbiased, or at least knowledgeable, advice on whether it is.
Do not take my word for it, just ask the FCA. Last week, it published a report following an investigation into the subject.
The snappily-named Key Findings on our Recent Work on Pension Transfer Advice is the Ronseal of regulatory reports: it does exactly what it says on the tin.
After collecting data on 45 firms centrally involved in the transfer market, the FCA conducted further assessment work on 18 of them. In a little over three years, these 18 firms have provided advice to more than 48,000 clients about their DB schemes. At the end of it, almost 25,000 people switched out of their schemes.
Yet less than 50 per cent of that advice was suitable. The report found that, among the many issues with the advice provided, firms were not doing enough to understand why a client actually wanted to transfer.
If clients said they wanted “to take control of their pension”, firms did not explore the reasons for this, which in turn meant they did not fully assess “whether the client is able or willing to take the risk required to achieve their objectives”.
Firms simply relied on generic objectives like “flexibility” or “increase pension” during fact finds, rather than drilling down to find out what these terms meant to the client.
Advisers were not properly assessing clients’ risk appetites in terms of trying to meet certain objectives or trying to determine whether some objectives were more important than others.
Some fact finds did not try to work out whether providing death benefits for spouses and dependents could be addressed within the existing schemes, or by taking out separate life cover.
Some advisers did not take longevity into account, or the conflicting demands between a desire to access the potential 25 per cent tax-free cash lump sum and that of wanting to have a large pension pot at retirement.
These were just some of the problems the FCA found. Assuming that 50 per cent figure in respect of problematic advice cited was repeated in terms of the actual transfers that took place, more than 12,500 of the clients whose pensions were eventually transferred were affected. That is a huge amount.
Now, there will be some advisers who argue that we are only talking about 18 firms in total from many thousands of advisers who give good advice. Most of them will either have nothing to do with DB transfers or will aim to provide a far more nuanced and skilful assessment of the costs and advantages of switching, which includes detailed knowledge of the scheme the client wants to leave. All very true. Except that the high numbers of transfers conducted by this relatively small number of firms strongly suggest they are presenting themselves as “experts” in the field and that, therefore, gullible clients are making a beeline for them.
The harm such a relatively miniscule proportion of firms in the advice market is doing, both reputationally and in financial terms, is massive. And there is another problem. The FCA might be able to deal with this small number of firms, either by closing them down or requiring them to surrender their pension transfer advice permissions.
But my concern is over the far larger number of advice firms who are not operating on such an industrial scale but have nevertheless provided advice to one or two, maybe three or four, clients. They thought they were doing the right thing by those clients.
Unfortunately, it is possible things have not turned out that way.
In a fantastic column on his website, former FCA technical specialist Rory Percival points out that, while some people who have commented on the issue might feel they are “very diligent with clients, undertake a full analysis and give suitable advice”, he does not buy this argument.
In fact, based on some of the comments he has read in response to the FCA research, he feels that they too may have been giving unsuitable advice to clients.
If Percival is right – and I suspect that he is – the DB pension transfer market is likely to be the next financial scandal.
At the very least, advisers will be paying through the nose in future Financial Services Compensation Scheme contributions.
As for me, I think I will stick with my occupational schemes for now.
Nic Cicutti can be contacted at firstname.lastname@example.org