Defined benefit pension transfer charges are being put under the microscope again as the regulator turns over more potential conflicts of interest.
With the British Steel Pension Scheme the latest to dominate headlines and the FCA ready to interrogate further as it extends its review to include all firms authorised to give pension transfer advice, case complexity and risk is forcing advisers to take a hard line when it comes to accepting clients and deciding on what to charge them.
There are currently 7,608 Personal Finance Society members with a statement of professional standing and a pass in at least one of the three pension transfer exams G60, AF3 or AF7, figures provided to Money Marketing by the professional body show.
Many will only take on pension transfer business for existing clients or charge significantly more for newcomers, however, while others will insist on a wider financial planning review process.
Mazars chartered financial planner Natalie Wright says new clients looking for a standalone piece of transfer advice will be turned away.
She says: “If they are just looking at unlocking value and are not interested in the wider financial planning aspect, we are not going to take them on.”
Wingate Financial Planning director Alistair Cunningham receives many enquiries from scheme members looking for a “tick box” exercise.
“They ring up saying a firm is trying to charge ‘X’ so they are looking for the lowest possible quote. They are probably not the clients for us.”
Typically charging a fixed fee, rather than hourly rate, Cunningham says: “Pension transfer cases would typically be £3,000 – more if there’s more than one pension under advice. More general, but non-DB transfer-related financial planning starts from £600.”
Addidi Wealth founder and managing director Anna Sofat also differentiates between new and existing clients, normally charging a fee for conducting the initial assessment.
“That fee varies, but we have set a minimum of £2,500. We used to charge £1,500 in the past but we found with the amount of work involved we were not even covering our costs. Having said that, £1,500 for an existing client may be acceptable but £1,500 for a new client is not.”
Sofat says there are other variables, such as the number of schemes the client is in, the level of familiarity with the scheme, and the ease with which you can deal with the provider.
“If it is a scheme we already know, we can be a lot more cost-efficient but with one we have not come across before there is a lot more work involved.”
LEBC The Retirement Adviser outsources its initial transfer analysis to O&M Pension Solutions, among others, for an average cost of £400 per case. In 2015 this was £175 per individual case.
Transfer specialist HDIFA, whose permissions were temporarily suspended after an FCA audit, said it had updated its fees since they were previously reported, but declined to comment on the new structure.
LEBC splits its business into two types: project-based work where the trustee and employer pay for their services; and advising individual clients, who pay an upfront fee directly, whether the transfer goes ahead or not. The firm typically charges £2,500 for this review.
Managing director Nick Flynn says subsequent work for any review then needs to be priced “sensibly”, based on an hourly rate.
In terms of hours spent on follow-up advice, he says 15 hours per DB transfer case is about average.
“We have seen a lot of charging at 3 per cent or 4 per cent, which – if the value is around £200,000 – will be a reasonable amount. But if someone has £800,000 or £900,000 then it becomes a huge chunk of money and starts to look like commission, to be honest.”
He says the rise of contingent charging – the model through which an estimated 90 per cent of BSPS members chose to pay for advice, according to advice firm Active Wealth, one of the firms involved with British Steel transfers – looks set for greater regulatory scrutiny.
Flynn says: “If I recommend you to something and you do it, that is considered contingent or commission. Some people are happy to pay it but for me, it does not seem to be in the spirit of things.”
Sofat agress that if you have a lower upfront charge but a higher charge – say 3 per cent – on any transfer value, there is a bigger incentive to recommend a transfer out.
“We stick to 1 per cent, which will cover our cost base, but because the initial report fee is at fair value, we can walk away at the end of that with no concern either way if the transfer goes ahead or not.”
At Tenet, adviser charges average £150 an hour with regional variations yet group risk and regulatory director Caroline Bradley says most appointed representatives charge “industry standard” 3 per cent initial and between 0.5 per cent and 1 per cent ongoing, depending on service levels.
She adds: “Those charges might be discounted if the client has a particularly large portfolio, because a 3 per cent charge on a pension of £500,000 is £15,000 – a very large sum.”
The FCA has been investigating the role of introducers and has expressed concerns over the influence they could have over authorised firms, such as financial advisers.
Writing to work and pension select committee chair Frank Field earlier this month, the FCA reiterated it had concerns over working with unregulated introducers and lead generators.
For the BSPS, unauthorised introducer Celtic Wealth Management reportedly referred 76 scheme members to Active Wealth. With average fees per referral as high as £750, the total amount earned has been estimated as £50,000.
LEBC’s Flynn recalls scenarios where clients have paid an introducer to “find them an IFA” where both parties physically share an office.
“It strikes me as a money spinner. I would not have thought there was the need for an introducer; there is more business opportunity than there is good IFA capacity.”
Pension transfer charges — a historical view
By Sam Brodbeck
Money Marketing research back in 2015 suggested that advisers and networks were charging wildly different prices for advising on defined benefit to defined contribution pension transfers.
As well as a split between charging on a time cost or percentage basis, some firms appeared to be charging as much as two times more than others.
Firms that offered pension transfer outsourcing also reported growing interest as volumes increased and the FCA’s new requirements left less advisers qualified to do the work.
Interest in DB transfers had risen as members became aware of the greater flexibility and favourable death benefits available to defined contribution pensions.
One network that asked not to be named said the current range for this type of work was between £700 and £1,200, with an hourly rate or minimum charge model becoming increasingly common among its advisers.
A spokesman added that the size of the pot “does not necessarily mean less work – although the options may be more limited and the time spend reduced as a consequence”.
Sense compliance director John Netting said: “It’s pretty dangerous for networks with appointed representatives up and down the country to have a one-size-fits-all policy. Notionally, most of the people doing DB transfers are on about £200 an hour billing rate – it’s not a simple area and most people holding the relevant permissions tend to be at the upper end of chartered in terms of qualifications.”
Intrinsic would not give an indication of how much its advisers charged. A spokesman said: “Intrinsic appointed representatives do not have a standard fee. Each adviser is able to set a percentage or fixed fee themselves.”
Advice firm Portal Financial charged 5 per cent of the value of transferred funds. A spokesman said this was because the work was “high risk” and required “lots of analysis and G60 qualified advisers”.
In contrast, Fairey Associates managing director Ed Fairey said they “normally” charged clients around 3 per cent.
Wingate Financial Planning financial planning director Alistair Cunningham said his firm used a time cost model and usually expected the work to cost around £2,000. He added that transfer advice was the only major service the firm did not offer on a fixed-fee basis because of the “open-ended nature of the work”.
Towry head of retirement planning Andy James said the advice firm typically charged around £3,000, depending “on the complexity and time taken”.
LEBC undertook transfers as part of exercises that were driven by corporate sponsors trying to reduce their DB liabilities, as well as individual cases. Divisional director of longevity Nick Flynn explained the firm used O&M Pension Solutions to undertake transfer value analysis, which cost £175 per individual but fell for bulk exercises. In addition, clients were charged on a time cost basis.
He said: “If you’re doing hundreds of transfers at once as part of a big project you might get the cost down to £600 a transfer, if they are looking to go into drawdown that would probably double.
“On an individual basis, the bill would be quite a lot more because there’s no economy of scale. It’s probably more like £3,000 or £4,000 on a time cost basis – it’s not a cheap bit of work, because it is not simple.”
Specialist retirement adviser Intelligent Pensions charged clients not immediately vesting their pension £1,000 to generate a report, including running a transfer analysis and issuing a suitability letter. Those at the point of retirement were charged £750. However, clients were not given the certification to allow them to get the transfer done without an adviser.
If the transfer went ahead, the firm charged 1.1 per cent of the transfer value and placed the funds in a product recommended by the firm.
Intelligent Pensions technical director David Trenner added that there was growing appetite from other advisers to outsource transfer business.
He said: “More and more financial advisers are interested in our service. We’ll advise on the stage in-between, charge 1 per cent for implementation, and then stand aside for the investment advice offered by the other adviser.”
Pension transfer specialist HDC accepted referrals from authorised firms for pots worth £100,000 or more. An initial suitability report cost £300. Following a transfer the first £150,000 of the fund was charged 2 per cent, the next £350,000 at 1 per cent, the next £500,000 0.5 per cent, and 0.25 per cent on anything above £1m.
HDC managing director Heather Dunne said business had grown “exponentially” in the last few months up to June 2015 as clients became aware of the pension reforms, and the FCA introduced tighter requirements on transfers.
Money Marketing first reported on DB transfer charges in June 2015. We have now updated this article to include the latest trends.