Defined benefit pension holders to be protected from unscrupulous advisers on commission

30 July 2019

Savers who are considering moving their pension pots will benefit from greater protection from unsuitable advice, the financial watchdog announced today

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The Financial Conduct Authority (FCA) is putting forward proposals to ban financial advisers from only getting paid when a customer moves a pension pot – also known as contingent charging.

At the moment, anyone looking to transfer out of a defined benefit pension scheme needs to get financial advice before doing so, if their pot is worth more than £30,000.

The problem lies in the way that financial advice is paid for. Most advisers operate a ‘contingent charging’ scheme whereby if the saver decides to transfer, the adviser gets paid, and if they don’t, the adviser does not receive payment.

The FCA believes this creates an incentive for advisers to recommend their clients transfer out, whether it is the best option for them or not.

It plans to ban the practice, to drive down the number of people who transfer out of valuable defined benefit pension schemes.

Overwhelmingly, it makes sense for most savers who have valuable defined benefit pensions to hold on to them, yet according to the FCA while only half of pension transfers are deemed suitable, advisers are recommending a transfer in 69% of cases - a big discrepancy. 

Defined benefit pension schemes pay out a secure income for life. The amount they pay is linked to the number of years the recipient worked for a particular employer or the amount they earned. As such, they are often valuable and in general worth holding on to, even if you are offered a large cash lump sum if you decide to transfer out.

Christopher Woolard, executive director of strategy and competition at the FCA, says: “The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market.

“By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”

Access to advice

There is concern however that banning contingent charging will make it more difficult for people with large pots, but low incomes, to access financial advice. This is because they will potentially be cash-poor and unable to afford the upfront costs.

Steve Webb, director of policy at Royal London and former pensions minister, says: “If contingent charging is to be banned, the FCA and the government need to find new ways of making transfer advice affordable and available.

"If the FCA does not have the power to enable people to claim advice costs out of their DB pension rights then the government needs to legislate to make this a right. Consumers should also have a right to a partial DB transfer to reduce the all-or-nothing nature of too many transfers.

"Until now, FCA actions have reduced the supply of DB transfer advice and raised the cost, driving some high quality advisers with unblemished records out of the market altogether. This has to change."

In February, MPs called for a ban on contingent fees after a major mis-selling scandal that saw thousands of savers in the British Steel pension scheme lose money.

Last year, it was revealed that £1.1 billion of DB savings were moved out of the British Steel pension scheme into riskier funds with high management fees.

On average, the amount transferred out was £400,000, but 20 different transfers saw more than £1 million moved.

Advice charges on these transfers typically ran at around 2% of the transfer value, while receiving funds imposed breath-taking annual charges and exit penalties from 5% to as high as 10%.

Tom Selby, senior analyst at AJ Bell, says: “The argument over contingent charging has always been a balancing act, with the FCA weighing up the dangers posed by the inherent conflict of interest created by the charging method with the potential impact a ban could have on people’s ability to access good quality advice.

“In particular, by banning contingent charging the regulator will make it more difficult for those with large pensions but on lower incomes to pay for advice.

“There are circumstances when it is in a client’s best interests to give up their guaranteed pension in favour of the flexibility and death benefits available through defined contribution schemes. Ensuring these people can access good quality advice is vitally important.”

The FCA is also looking to address the conflicts of interest which arise where a financial adviser advising on a pension transfer stands to receive ongoing fees – which in some cases can be for 20-30 years following the transfer.

It has proposed that advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme.

Following a consultation on the proposals, the FCA says it will issue its final rules for non-workplace pension schemes in early 2020.

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