A potential solution to the contingent charging dilemma would be to allow clients to pay for DB transfer advice from their final salary schemes, Royal London director of policy Steve Webb has argued.
The former pensions minister said potential clients could be put off seeking defined benefit (DB) transfer advice in a non-contingent model by having to find upfront cash to pay an adviser. He argued his solution could solve that problem while removing any conflict of interest issues.
As an example, someone with a transfer value of £200,000 who was charged £4,000 for advice would see a 2% reduction in their final pension in retirement. Webb said the reduction was unlikely to have a material impact on the client’s standard of living but would enable them to take advice on transferring.
Earlier this week, the Work and Pensions Committee launched an inquiry into advice on DB pension transfers. It asked if there were any alternative solutions that could remove conflicts of interest, but avoid any possible negative impacts of an outright ban on contingent charging.
This is not the first time the committee has involved itself with contingent charging – in a previous inquiry, the committee urged the Financial Conduct Authority to ban the practice, but the regulator decided to hold off on making any changes to its rules. The watchdog argued the evidence did not show “contingent charging is the main driver of poor outcomes for customers”.
Webb pointed out advice costs can already be deducted from defined contribution (DC) pensions in certain circumstances, but cannot currently be set against DB pension rights.
“It is understandable that pension scheme members might be put off thinking about a transfer by the need to find several thousand pounds of cash upfront to pay for advice,” he said.
“Contingent charging has been one way of helping to reduce the upfront cost, but has raised concerns about a risk of a conflict of interest if the adviser is paid more when a transfer is recommended.”
‘With limits’
Webb continued: “One possible way to square this circle would be to pay for advice out of the client’s DB pension rights, though with limits on the amount that can be deducted and on the number of times a deduction could be made. This could remove the need for clients to find cash upfront to pay for advice and might enable more advisers to offer a viable fixed-fee option when charging for advice.
“This could be a win-win and I hope that the select committee will include this idea as one of the options for tackling the issues around contingent charging.”