Watchdogs could ban financial advisers from offering ‘no transfer, no fee’ deals to savers looking to ditch final salary pensions.
Fears that such offers cause conflicts of interest that can influence recommendations were sparked by the British Steel debacle, where vulture advisers swooped in to exploit workers with valuable guaranteed pension benefits.
Savers are being tempted to give up valuable defined benefit pensions, which promise a set income for life, by large sums paid into inferior pensions they must invest themselves – with offers potentially worth hundreds of thousands of pounds.
Decision time: Many people are being offered gigantic transfer values to leave final salary scheme
A ban on ‘contingent charging’, as such deals are known in industry jargon, is being mulled by the Financial Conduct Authority, which has called for feedback by the end of May.
It is worried that savers taking free advice on the basis of ‘no transfer, no fee’ can then end up pressured into moving pots, allowing advisers to pick up a big payout.
The announcement came as the FCA confirmed earlier proposals to tighten up rules on how financial advisers should handle clients wanting to transfer out of final salary pensions.
Also known as ‘defined benefit’ pensions, these are typically the safest and most generous available.
But pension freedoms have led to many people considering whether to abandon them and invest their funds independently instead. A further temptation is added by the ability to pull all the cash from a pension after the age of 55.
Savers must already pay for financial advice before moving a final salary pension worth £30,000-plus.
From 1 October, financial advisers will have to carry out personalised analysis of options and give a personal recommendation, plus give a comparison to show the value of benefits being given up by clients.
The FCA has also rowed back on a plan to abandon existing guidance that an adviser should always start from the assumption that a transfer will be unsuitable.
And the watchdog has got stricter about the role of ‘pension transfer specialists’, whom it says should do more than just check the numbers, but also assess the reasonableness of the personal recommendation and the comparison given by an adviser.
It is asking for feedback on whether advisers offering help on pension transfers should also have investment qualifications.
Fears that ‘no transfer, no fee’ offers cause conflicts of interest that can influence recommendations were sparked by the British Steel debacle
Christopher Woolard, executive director of strategy and competition at the FCA, said: ‘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.’
Previous research by the Financial Conduct Authority found that only half of financial advice given on transfer meets its standards on getting a suitable recommendation or subsequent pension product.
MPs on the work and pensions committee have scolded the regulator for failing to clamp down hard enough on advisers targeting British Steel savers.
In a recent report they said the workers were ‘shamelessly bamboozled’ by vulture financial advisers in an erupting mis-selling scandal that threatens many other savers,
Urgent action is needed to protect people with generous and guaranteed final salary pensions from being cheated, according to their scathing report.
Why are people ditching final salary pensions?
Many people are being offered gigantic transfer values – often worth vastly more than the current size of their pots – by employers keen to clear the obligation to pay expensive final salary pensions off their books.
And pension freedom reforms mean people who transfer out can invest their savings in the hope they will continue to grow, and get the opportunity to leave whatever is left over to loved ones when they die.
Savers are also concerned that many final salary schemes are in deficit, putting their pensions at risk. But recent favourable market moves and bigger contributions by employers are helping schemes to close such holes.
JLT Employee Benefits, which provides pension services to employers, says in its latest quarterly report that these two factors meant FTSE 100 firm’s estimated final salary deficits were cut by 32 per cent in the year to the end of June 2017.
JLT also noted that many firms could afford to close deficits entirely if they chose, saying: ‘Total deficit contributions continued to be dwarfed by dividends declared across the index; 42 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend.’
Nathan Long, senior pension analyst at Hargreaves Lansdown, says: ‘The regulator has announced that defined benefit transfers are for the few not the many, by keeping in place its assumption that they are generally not in people’s best interests.
‘These types of pensions offer a valuable promise to provide income in retirement and do not expose members to the vagaries of the stock market or interest rate movements.
These types of pensions offer a valuable promise to provide income in retirement and do not expose members to the vagaries of the stock market
Nathan Long, Hargreaves Lansdown
‘Transfers to more modern defined contribution pensions can provide greater flexibility in retirement, but few people come to retirement with only a defined benefit pension and transfer values are not generally adequate compensation for leaving, meaning most people are best off staying put.
‘This announcement is a positive for ensuring retirees are adequately protected.’
Andrew Tully, pensions technical director at Retirement Advantage, said: ‘Pension transfers have probably been the biggest, and perhaps most unexpected, trend emerging from pension freedoms.
‘This behaviour has largely been driven by record high transfer values and people looking to tailor benefits that better suit personal circumstances. But it has also been driven by employers looking to re-structure their defined benefit schemes or close them altogether.
‘A ban on contingent charging should be welcomed. It can’t be right that in certain circumstances advice is only paid for if a transfer goes ahead.
‘The starting assumption that advisers need to evidence a transfer is in the client’s best interest unless proved otherwise is a positive move.
‘By transferring a defined benefit pension someone is giving up very valuable guarantees which mean these decisions should never be rushed or taken lightly or without the protection of proper regulated financial advice.
‘Transfer values continue to look attractive and I’ve often seen values above 30 times income and in some examples even higher.
‘‘Despite some recent very poor practices in the market which have rightly been called out, I remain of the view that transferring a final salary pension can work to the customers’ advantage in some circumstances, but for the majority retaining the defined benefit membership will continue to be the best course of action.’
Kay Ingram, director of public policy at pension consultant LEBC Group, said: ‘We would support a ban on contingent fee charging for this advice.
‘We cannot escape the conclusion that a contingent fee structure must inevitably bias the advice in favour of recommending a transfer.
‘We believe that all advice should start from an impartial standpoint and needs to take full account of individual circumstances.
‘For this reason we would not agree that advisers should assume a transfer is unsuitable, even if in a majority of cases it may well be.’
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