The UK’s Department for Work and Pensions (DWP) has opened an inquiry into contingent charging by advisers for defined benefit pension transfers.
The concept of contingent charging mimics the “no win, no fee” concept in the legal industry, meaning an adviser generally only gets paid when a transfer is made.
This has led to growing concerns that transfers could be advised even when it is not in the best interests of the client.
As a result, the Work and Pensions Committee is asking members of the public to provide evidence about their experiences with DB pension transfers.
It follows the Financial Conduct Authority shelving a ban on contingent charging in October 2018.
The ban was to be introduced following the British Steel scandal, which saw some financial advisers act like “vultures” and “bamboozle” workers into transferring their pensions.
Protect consumers from vultures
Frank Field MP, chair of the committee, said: “The FCA has confirmed to me that it shares many of the committee’s concerns about the scourge of contingent charging. But to tackle this, and to protect consumers from the vultures circling around their pension pots, it needs more proof of what is really happening to people.
“It has explained to me the complexities of contingent charging, and how it needs to carefully consider its possible interventions so as not to cause unintended harm, particularly to vulnerable customers. The FCA has said it would welcome the committee’s help to find out more, and we’ll be happy to do everything we can to make sure we get the right safeguards in place.”
Specific questions
In particular, the committee would like to hear from individuals who have taken or received advice about transferring.
- Did you have a good or bad experience?
- Do you think this was driven by the financial adviser’s charging structure?
For those with views on the matter, but who have not had any experience of transferring a pension, the committee would like responses to the following questions:
- Does contingent charging increase the likelihood of unsuitable advice?
- What would be the impact of a ban on contingent charging on consumers and firms and how could any negative effects be minimised?
- Are there any alternative solutions that would remove conflicts of interest but avoid any possible negative impacts of an outright ban on contingent charging?
The deadline for written evidence is 31 January 2019.
British Steel
The focus on contingent charging stems from the British Steel fiasco that saw workers advised to transfer against their own interests.
The DWP stated that, during its inquiry into pension freedom and choice, it had “received worrying evidence about the financial advice given to members of the British Steel Defined Benefit Pension Scheme”.
When the scheme was wound up, existing BSPS members were given a couple of options of what to do with their pension money. One of which was to transfer out completely.
Under existing rules, anyone with a pot in excess of £30,000 ($38,205, €33,520) must take financial advice.
A report from the Work and Pensions Committee found that many members had been given bad advice and transferred their funds when it was not in their best interests.
The committee concluded that a supposedly independent financial adviser could be incentivised to give bad advice—ie suggest a DB transfer—because of the way their fees were structured: the adviser was only paid, or paid much more, if the person decided to take a DB transfer.
The committee recommended that this charging structure should be banned for defined benefit pension transfer advice.
A subsequent consultation by the FCA, however, reached a mixed conclusion.
It summarised the pros and cons of a ban and said responses to the consultation highlighted the “complexities and interlinked issues that need to be worked through and considered”.
As a result, the FCA did not introduce a ban on contingent charging and said it “needs to carry out further analysis of the issues”.
In particular, it said there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes.
