The well-publicised problems with advice on transfers from the British Steel Pension Scheme (BSPS) has ben arguably the most high-profile test to date of the pension freedom and choice policy. While sponsor strength has for many who have transferred out of DB schemes to date been a hypothetical issue, BSPS members have faced a more pressing set of decisions.
Roughly 125,000 members, including both current and former steelworkers have faced a choice of moving to the new, less generous BSPS 2 scheme or remaining in the current scheme and moving to the Pension Protection Fund or transferring out. The deadline is now passed and more than 2,000 have transferred, though 12,000 sought a transfer value say the scheme trustees.
This point in the DB to DC saga follows FCA interventions in a number of firms specialising in transfer advice in the wider market that have led to them stopping transfer business of all kinds. Some other firms have been able to continue advising clients in this area however.
But the position of BSPS members has caught the attention of both politicians and the national press, placing the DB to DC transfer process under an unprecedented level of scrutiny. This has shown that a substantial amount of the transfer advice relating to BSPS leaves a lot to be desired and the FCA has now established voluntary requirements (VREQs) with nine firms of advisers that stop them offering transfer advice.
Last month the FCA published rule changes that would see advisers undertaking pension transfer advice required to have the same qualifications as investment advisers and which proposed a ban on contingent charging.
It also confirmed that proposed rules requiring transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances had made it to the rulebook. The new rules also replace the transfer value analysis with a requirement to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up. As a result, several providers have already stopped offering free TVAS calculations.
DB transfers has been a very public issue, driving strong views on both sides of the argument for and against the practice.
As concerns over poor advice emerged on social and mainstream media last year, a group of IFAs and paraplanners, determined to remedy what they saw as a threat to members’ interests and advisers’ reputations, launched Operation Chive, visiting steel towns such as Port Talbot to give pro bono advice to members considering transfers. This led to some members rejecting previous advice to transfer and either reversing their decision or adopting different investment strategies to those put forward by their initial adviser.
Meanwhile, the Work and Pensions Select committee, chaired by veteran Labour MP Frank Field, launched an inquiry into pension freedoms in September 2017, which swiftly widened to cover British Steel.
In evidence sessions and correspondence, the committee has fired questions and criticisms at many of the main actors including the Pension Regulator, the scheme trustees, the FCA – several times – and some of the advisory and introducing firms involved.
Field’s correspondence contains stinging criticisms of the FCA saying the watchdog was at risk of “sleepwalking into another huge pension misselling scandal” and its response “wholly inadequate”.
The FCA’s written responses from its director of supervision Megan Butler late last year, and a letter bristling with indignation from FCA chief executive Andrew Bailey in January 2018, gave a huge amount of information about the FCA’s approach to transfers in general and BSPS in particular. The regulator found just 51 per cent of files from BSPS pass muster on suitability. While this is better than some other recent file reviews, it highlights the challenge in regulating this sensitive area of financial advice.
Factor in the fact that the regulators and consumer groups have been highlighting significant levels of scamming of retired pensioners in the newly liberated decumulation market, are the pension freedoms fundamentally flawed or just in need of an improved regulatory straightjacket?
Richard Butcher, managing director of PTL and chair of the Pension and Lifetime Savings Association, says: “From a trustee perspective, we have a statutory obligation to pay that transfer if someone asks for one. We can delay it to some extent, and can provide them with information to contextualise the decision, but we can’t advise them and we can’t stop them. Where we start to get in a tangle is where we know it is not a good idea. If it’s scamming there are things we can do, but if it’s legitimate but questionable advice, we can’t advise or really give guidance.”
As for those potentially receiving schemes, Denton Pensions director of technical services Martin Tilley believes regulation restricting transfers to SSAS will bring an improvement. He says: “A few advisers, through not adhering to regulatory standards, have damaged the adviser brand and pensions name in general. The continual reporting of failures relating to transfers destroys consumer confidence and makes it harder for the genuinely good advisers to reach the people who need the advice most. Ceding schemes have to make sure their members receive guidance leaflets detailing where to go for guidance and advice.”
Significantly, the new rules will require advisers to consider both the transfer advice and subsequent solution together when assessing suitability, although Bailey’s letter says these plans were not adjusted since the BSPS furore.
Former FCA advice market specialist Rory Percival, now a consultant, says there are lessons to be learnt from BSPS, not least the time pressures that arise when big scheme changes are envisaged. He wants to see coordinated action between FCA and TPR to create a panel of approved IFAs to deal with transfers, ensuring standards but also dealing with capacity issues.
Percival argues that contingent charging is a significant problem especially where one transferring case may be funding two cases that do not transfer.
He adds: “The regulator shouldn’t respond by making it mandatory not to charge this way, but the sector should move in that direction.”
Financial Inclusion centre director Mick McAteer, a former policy adviser at Which?, was one of the most outspoken critics of pension freedoms before its introduction. He would ban contingent charging for transfers – where advisers are only paid if the transfer goes ahead. He says: “The transfer issue is one of the manifestations of the flaws of pension freedoms. DB is the most high profile because of the sums of money involved but there has been a growth in scams and fraud generally, money being taken out of the market and very little innovation to add value over and above annuities.
“I cannot think why contingent fees were allowed to stay. It feels like we have preserved a conflict of interest and incentivised people to encourage transfers when it is not in their client’s interest. There are some hefty fees available. That is misselling.
“Clearly tackling contingent fees by banning them and equalising the market would be a much-needed step, but there is also a lack of clarity in the conduct of business rules governing pensions overall. The FCA should take over all conduct of business matters for all forms of pension. There is an overlap between FCA and TPR. The ideal is for the FCA to take responsibility for conduct, and the TRP should play a role for DB schemes like the PRA does for banks taking responsibility for prudential matters.”
Operation Chive – an adviser’s story
Penney, Ruddy & Winter director and chartered planner David Penney was one of several advisers who gave pro bono advice to members of the BSPS through Operation Chive, which stands for ‘counselling, help, information, volunteer, exchange’. His experience has left him with a long list of concerns.
He says: “Where I see part of the problem is that people giving the advice don’t understand final salary pensions. There is either a problem with the qualification or, if it is not the technical knowledge, then it is the lack of experience alongside the technical knowledge. It should be harder to become a pension transfer specialist than taking a CISI or CII exam, certainly where someone hasn’t worked in DB pensions before.”
He has just organised a transfer for a very ill client, securing a lump sum transfer and a spouse’s pension, reports that one scheme he spoke to before had never been contacted before. “I can’t believe they have never had a terminally ill member before,” he says.
He adds that more advisers need to really look at whether a client’s objectives around flexibility and/or death benefits can be achieved by a strategy that could see them keep them in the final salary scheme.
He charges fees for transfer work – whatever the recommendation – but is opposed to contingent charging. “If you weren’t worried about reputation, if it’s three per cent of half a million and you are going to get £15,000 to make it fit, plus another half million funds under management, versus zero for turning it away, I just don’t believe you are not going to be slightly influenced. I can’t see how the FCA are comfortable with this.”
The FCA defends its action on DB transfers
Main statistics from a letter from FCA chief executive Andrew Bailey to the Work and Pension Select Committee on 18thJanuary 2018, defending its work on transfers
Work on transfers in general
Phase 1 – October 2015 to March 2016
Request for information from six specialist pension transfer firms with 29 detailed file reviews from four firms
Findings – 24% or 7 contained suitable advice
35% or 10 contained unsuitable advice
41% or 12 advice unclear
Phase 2 begun in December 2016
Looked at 16 additional firms including 9 visits and 71 sample files.
FIndings – 38% or 27 were suitable
34% or 24 contained unsuitable advice
28% or 20 were unclear
Four firms agreed to vary permissions i.e. stop doing transfers
Phase three began in June 2017
The latest work in this phase included a formal request for information from 45 firms sent this December. The FCA is looking at the information prior to considering visiting some of these firms.
The FCA plans to request data from all adviser firms doing transfer business
More generally 14 firms in total have been referred to enforcement
The FCA outlined that it is due to publish final rules for a new DB transfer framework in March including
Ensuring all advice involves a personal recommendation
Changing the statutory assumption on suitability to reflect pensions freedoms
Introducing a new transfer analysis which includes a numerical presentation
The regulator says it has not seen any issues arise from BSPS which have not already been addressed in the consultation process.
The FCA contacted 109 financial adviser firms, 66 of which provided further information on business volume, pipeline clients and insistent clients, leading to 21 firm assessments looking at sample files.
This work accounted for 1,766 transfers from a total of 2,054 transfers to date from BSPS.
Of the 129 files reviewed from the 21 firms, 51% have been deemed suitable, 33% unsuitable and 16% unclear.