The DB pensions financial advice market has been anticipating a shake up for a while. The FCA’s findings have consistently shown an alarmingly high number of members being advised to transfer, and advice from some firms is simply not good enough.
Five years since the pension freedoms were introduced, the market has seen 235,000 advice recommendations covering over £80bn of assets. Enough is enough - the FCA has finally decided to act and has set out the next package of measures to improve the quality of advice. The new measures are mostly due to come into force from 1 October 2020 and the jury is still out on whether they will truly address the current failings.
We take a look at the key changes, along with what it means for the DB transfer market and members of DB schemes in particular.
A ban on contingent charging
The headline-grabbing measure that is polarising the industry is a ban on financial advisers charging different amounts based on whether or not a member takes a DB transfer value. This is to address the conflict of interest of advisers having an incentive to recommend a transfer value over staying put in the DB scheme.
While the FCA has been unable to prove a direct link between contingent charging and poor member outcomes, removing this potential conflict of interest should provide a long overdue improvement in confidence and transparency in the market. This can only be a good thing.
However, the ban comes with its own problems:
Reduced availability of advice - The ban will increase costs for advisers and heavily impact their business models, potentially driving them out of what is already a supply constrained market. This won’t be helpful for members trying to source and access quality advice.
Advice barriers for lower earners - Contingent charging makes advice more accessible to those on lower incomes - upfront costs are low and, where members do transfer, the contingent fee can usually be met out of the transfer amount. A change in pricing model means those who may be most in need of advice are unable or unwilling to pay for it, and simply end up sleepwalking into a DB retirement. The FCA has provided some easements here which permit contingent charging to still apply for those who can evidence serious financial hardship but that won’t solve this. This is something the FCA has acknowledged but seems happy to live with.
Insistent clients - Without clear upfront education, there is a strong risk that members self-funding upfront advice costs of perhaps £5,000 will have a strong desire to transfer out, and may try and do this regardless of the advice recommendation. This won’t be in anyone’s best interests and could store up risk for advisers for many years to come. The best advisers should rise to the challenge here – it’s about managing expectations early in the process and helping consumers understand the true value of quality advice, regardless of the recommendation.
Ongoing fee conflicts - The ban does very little to address conflicts of interest inherent with advisers selling ongoing advice services, or unsuitable drawdown products to those who transfer. Ongoing advice can be incredibly important to ensure member outcomes are protected for the long term, but % of funds under management charging structures for providing this may well be the next place the FCA looks.
Abridged advice
Another controversial change is the introduction of lighter touch, lower cost “abridged advice”. This is essentially designed to be a formal triage process where it is apparent that it is unlikely it would be in a member’s interest to transfer. The outcome of abridged advice can only result in a ‘don’t transfer’ or ‘unclear, you need to take full advice’ recommendation.
The market is still divided on the costs vs benefits of abridged advice. Advisers are not convinced that the work required to deliver abridged advice is significantly less than full advice, whilst the risks of getting it wrong are significant. It also feels challenging to convince members to pay for something that can’t give them the answer they potentially want.
It remains to be seen how many advisers will actually offer this. Perhaps the FCA might have been better off providing advisers with greater scope and clarity on effective triaging to support full advice.
Less controversial changes
There are some other common-sense changes introduced which most good advisers should have been adopting for years. These include: some formal professional development requirements for advisers; greater transparency around charges and advice recommendations; and rather than starting with complex and expensive investment products, the need to consider the member’s existing workplace DC scheme as a location for any transferred DB benefits.
The important role of trustees and sponsors
The post COVID-19 world will see members in increasing need of quality DB transfer value advice. However, the FCA seems prepared to accept that at least a significant minority of members will sleepwalk into a DB retirement as they won’t be willing or able to fund the upfront advice costs. The case for trustees and sponsors to do more to support their members has never been greater.
By facilitating financial advice, trustees and sponsors can ensure that members have access to high-quality advice which is priced transparently and delivered affordably through economies of scale. Meeting the advice cost on behalf of members also removes any bias members may have, meaning members will be less likely to make a bad decision against the advice recommendation. This approach can ultimately help deliver better member outcomes for all.
Although there is more work to do, it’s great to see many trustees are already rising to the challenge:
77% of Trustees see it as their responsibility to communicate with members regarding their options.
90% have already, or are considering, facilitating financial advice for their members with a reputable IFA.
The key to good member outcomes is to supplement the FCA’s measures with a more trustee-driven approach to supporting members with their options. A win-win for all parties.
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