No transfer, no fee charges
The Committee’s recently completed inquiry into Pension freedom and choice examined ways to ensure that people saving for their pensions are equipped to make well-informed choices, and are well served by the pensions marketplace. Our report on the British Steel Pension report found that scheme members were ‘shamelessly bamboozled’ by advisers and unregulated introducers into signing up to ongoing adviser fees and unsuitable pension products and investments, characterised by high investment risk, high management charges and punitive exit fees. The Committee concluded that the use of contingent charging (‘no transfer no fee’) by DB transfer advisers gives rise to an ‘inherent conflict of interest’ and recommended that the FCA ban the use of contingent fee models for DB transfer advice.
Adviser charging structures
On 26 March 2018 the FCA published a consultation paper which among other things seeks views on potential changes to adviser charging structures, including a possible ban on contingent charging. The consultation will result in an FCA policy statement on pension transfers in Autumn 2018.
Terms of reference
Following on from that work, this new inquiry focuses on whether the pensions industry provides sufficient transparency around charges, investment strategy and performance to consumers. The Inquiry will examine whether enough is being done to ensure individuals:
- get value for money for their pension savings;
- understand what they are being charged and why;
- understand the short- and long-term impact of costs on retirement outcomes;
- can see how their money is being invested and how their investments are performing;
- are engaged enough to use information about costs and investments to make informed choices about their pension savings; and
- get good-value, impartial service from financial advisers.
Recent years have seen a rapid rise in enrolment in workplace pension schemes, creating millions of new retirement savers. Alongside this, pension freedoms have spurred a sharp increase in demand for drawdown products, and there has also been a surge in transfers out of defined benefit schemes, with funds principally moving into self-invested personal pensions (SIPPs). These developments have intensified concerns about the effect of investment management charges, transaction, advisory and other intermediation costs, in eroding the value of individuals’ savings. These are part of broader concerns that low levels of customer engagement and understanding, coupled with costly and opaque intermediation, risk leading to poor outcomes for pensioners.
Workplace pension saving
Since 2015 default auto-enrolment DC plans are subject to a 0.75% charge cap. The Government has this year introduced regulations to improve cost and investment disclosure within the accumulation phase to help auto-enrolled savers understand and compare schemes’ value for money and the long-term effect of charges on savings.
Since April 2015, FCA-regulated workplace pension schemes must appoint an Independent Governance Committee (IGC) to scrutinise value for money on behalf of scheme members and make representations to the provider or FCA as appropriate.
The FCA’s Retirement Outcomes Review (June 2018) highlighted a lack of competitive pressure and low customer engagement in the marketplace for drawdown products. It found that drawdown charges vary from 0.4% to 1.6% between providers (higher on average than in accumulation) and can be complex, opaque and hard to compare: products can have as many as 44 charges linked to them.
The FCA proposes that providers should offer a range of simple low-cost ‘investment pathways’. It is also working with the Association of British Insurers (ABI) and Money Advice Service (MAS) to progress the development of a drawdown comparison tool.
Our work on defined benefit pension transfers highlighted concerns about the fee structures in self-invested pension pensions (SIPPs), which are the main destinations for such funds. We found that poorly-advised individuals are at risk of their funds being transferred into vehicles with high ongoing charges, early-exit fees and expensive intermediation.
FCA research published in October 2017 showed that less than half (47%) of DB transfer advice it reviewed nationwide met its standards with suitability rates far lower than for other forms of financial advice.
Transfers out of DB pension schemes have surged: £22.44bn was withdrawn from DB funds in 2017, more than double the amount in 2016. Financial advice must be sought for any DB transfer worth £30,000 or more – but major issues have come to light regarding the practices of advisers and marketers in this segment of the financial advice marketplace.
FCA research published in October 2017 then showed that less than half (47%) of DB transfer advice it reviewed nationwide met its standards. 17% of adviser recommendations were unsuitable and 36% were of unclear suitability. The product/fund recommended by advisers were only found suitable in 35% of cases. These suitability rates are far lower than for other forms of financial advice.
The FCA told us ( PDF 3.83 MB) that its 2018 follow-up work involves asking for data from all pension transfer advice firms “with the intention of assessing practices across the entire market to build a national picture.”
In our British Steel Pension Scheme report we found that members were being ‘shamelessly bamboozled’ by advisers and unregulated introducers into signing up to ongoing adviser fees and unsuitable funds characterised by high investment risk, high management charges and punitive exit fees. The report recommended that the FCA:
- drop the proposal it made in June 2017 to remove the starting assumption that a transfer out of a defined benefit (DB) scheme would not be in the best interests of the client;
- ban advisers from charging clients on a contingent fee basis (‘no transfer no fee’) on conflict-of-interest grounds (as it biases advisers in favour of recommending a transfer); and
- make its register easier to use.
On 26 March 2018 the FCA published a policy statement and consultation paper. The policy statement confirmed that the FCA would not proceed with scrapping the starting assumption against transferring out (a decision which was welcomed by the Chair). The consultation paper seeks views on potential changes to charging structures, including a possible ban on contingent charging. It also proposes raising qualification levels for pension transfer advisers. The consultation will result in an FCA policy statement on pension transfers in Autumn 2018.
The FCA also recently told us ( PDF 266 KB) that it has 33 open investigations into financial advisers suspected of having misadvised pension transfer clients, and have additionally banned four financial advisers.
Send us your views
Send us a written submission via the online form – the deadline is 3 September 2018
The Committee invites evidence from all interested parties on the following questions:
- Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
- Is the Government doing enough to ensure that workplace pension savers get value for money?
- What is the relative importance of empowering consumers or regulating providers?
- How can savers be encouraged to engage with their savings?
- How important is investment transparency to savers?
- If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
- Are Independent Governance Committees effective in driving value for money?
- Do pension customers get value for money from financial advisers?