The FCA’s consultation on DB transfers is a welcome start, says Mike Morrison – although he questions whether it will actually make any difference to the advice market on pension transfers.
The FCA’s recently launched consultation on pension transfers (CP 17/16) is a welcome start but, in its current format, it is questionable whether it will actually make any difference to the advice market on pension transfers.
At the heart of the issue around defined benefit (DB) transfers is a consumer transaction where many people are forced to take advice but either can not find an adviser willing to give the advice or feel the advice is too expensive. The consultation does nothing to address this core issue.
Unlike most consumer transactions, the market for DB transfer advice can be very unbalanced in favour of the seller, with the demand for advice outstripping the supply. In many cases, the consumer has to find an adviser to provide them with a service they do not think they need, at a cost they are unsure of. Often they will have to pay for that advice – even if it goes against their wishes to transfer.
This is leading to a perception of poor customer outcomes and goes against the principles of pension freedoms, which are trying to encourage people to view their pension savings as money they control.
The consultation is rightly addressing three areas around DB transfer advice that appear outdated in today’s market but, when you look at the detail, it is hard to see whether the proposed changes will do anything to improve access to advice in this area.
First, it is positive the regulatory presumption that all such transfers are unsuitable is to be removed. However, the regulator still states that, for most people, retaining safeguarded benefits will be in their best interests and that advisers should have regard to this. I am not sure that gives advisers much more confidence to get involved in this market with less retrospective regulatory concern.
Second, a requirement that all advice should include a personal recommendation is a welcome development. The paper then, however, states “most regulated advice on the transfer and conversion of safeguarded benefits is currently given as a personal recommendation” with a “few cases” not doing so’. So again, is this really going to change much by way of improving customer outcomes?
Finally, there will be a rewrite of the pension transfer analysis system requiring the introduction of a ‘transfer value comparator’ (TVC) with some form of cashflow modelling. This is another important area to address because the transfer value analysis assumptions are hopelessly out of date – yet the new TVC shares the same flaw as the current analysis.
This is because the analysis puts annuity rates at its heart, when annuities are wholly irrelevant. The concept of someone taking a transfer value now and then buying an annuity at the point of retirement defeats the whole objective of a DB transfer in the first place.
Our preference would be to project the income that can be generated from the transfer value from normal retirement age, using sensible growth rates and a standard table of sustainable income drawdown rates and then compare this level of income with that being foregone.
Core problem compounded
The ongoing Financial Advice Market Review has as one of its aims ‘to stimulate the development of a market to deliver affordable and accessible financial advice and guidance to everyone’. For me, the pension transfers consultation is a missed opportunity to develop this further. If anything, the new proposals might create more work for advisers, which would push up the price of such advice and compound the core problem of consumer access.
According to the FCA the majority of financial advisers are already providing a fantastic service resulting in a personal recommendation. This should have been an opportunity to develop a new framework with the aim of bringing more advisers into the market to provide such a service.
The regulator should also have looked at the concept of contingent charging where advisers are only paid when the transfer goes ahead. Recent research by AJ Bell showed some 50% of advisers operate on this basis. There is a danger this creates a bias to recommend a transfer or that advisers will not even accept cases if their initial assessment is that a transfer will not be appropriate.
We need a market where consumers understand the advice is the product not the resulting pension contract.
Clearly consumer protection is key and no one wants another pension misselling scandal but, in many cases, the equation has changed considerably since the 1980s and 1990s and the advice profession has developed significantly. The problem now is making sure people have access to that valuable advice.
Mike Morrison is head of platform technical at AJ Bell
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