Final salary transfer charges face regulatory shake-up

Kyle Caldwell
27 March 2018

The Financial Conduct Authority (FCA) is considering banning ‘contingent charging’ for final salary pension transfers, as part of a wider move to tighten up rules and guidance on pension transfer advice. 

The intervention from the City watchdog comes nearly three years on from the introduction of pension freedoms, which resulted in a surge in demand to cash in final salary or defined benefit (DB) pension schemes. According to the FCA, around 100,000 to 120,000 transfers are taking place each year, with an average transfer value of £250,000; one in three consumers who receive advice choose to cash in their financial salary schemes. 

The FCA adds that 30% of transfers are ‘unsuitable’, while also stating that it has found no evidence whatsoever of unsuitable advice not to transfer.

For most the benefits of final salary schemes or DB schemes are not worth giving up, as they offer employees a guaranteed income for life when they retire, which is typically inflation-proofed. The amount has historically been based on a percentage of a worker’s final salary multiplied by the number of years they have been in the scheme, though more recently schemes have been modified to base payouts on a less generous ‘career average’ salary. 

In the light of the surge in final salary pension transfers over the past couple of years, the FCA’s new rules require advisers undertaking pension transfer advice to have the same qualifications as investment advisers. The regulator has also introduced a requirement for advisers to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.

Moreover, the FCA has reiterated its stance that a financial adviser should start from the assumption that a final salary transfer will be unsuitable for the client.  

The regulator is also considering banning ‘contingent charging’. Under this charging structure, consumers only pay for advice when they transfer out of a final salary pension scheme. If the transfer does not take place, no cash is exchanged. The worry from the regulator’s point of view is the potential conflict of interest could lead to unsuitable advice to ensure a transfer goes ahead and the adviser is paid.

Christopher Woolard, executive director of strategy and competition at the FCA, says: 'Defined benefit pensions are valuable, so most people will be best advised to keep them.  However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.

'We are also looking at whether further changes are needed to improve the quality of advice in this area.  In particular, we recognise that there is an inherent conflict of interest when advisers use a contingent charging model so we are asking for views on whether we should ban contingent fees for pension transfer advice. Defined benefit pension transfer advice continues to be a key area of focus for the FCA.'

Malcolm McLean, senior consultant at Barnett Waddingham, says there’s a clear risk of an inherent conflict of interest when financial advisers use contingent charging and has called on the FCA to ban the practice. 

‘The situation is complicated, but if there is evidence to show that contingent charging is contributing to the level of unsuitable advice being dispensed in a material way, rather than procrastinate further FCA should probably intervene and bring the practice to an end as soon as possible,’ he says. 

Last month, the Work and Pensions Committee described final salary pension transfers as 'another major mis-selling scandal' that is 'already erupting'. 

In its report into the British Steel Pension Scheme (BSPS), the committee said it had found ‘worrying evidence’ that members of the scheme have been ‘exploited for cynical personal gain by dubious financial advisers in tandem with parasitical so-called ‘introducers’.

The report comes after 130,000 members of the British Steel Pension Scheme had a new deal struck for them in August 2017 to protect their scheme ahead of a takeover of Tata Steel.

But despite this deal, the committee found that in the process of transferring their DB pensions into defined contribution (DC) schemes, many BSPS members were ‘shamelessly bamboozled’ into signing up to ongoing adviser fees and unsuitable high-risk investment funds with high management charges and punitive exit fees.

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