The FCA has announced a ban on “contingent charging” as part of a package of measures to address “weaknesses” across the defined benefit (DB) pension transfer market. We have frowned upon such conditional charging methods for many years and have felt that regulatory intervention was long overdue.
Basically, this approach involves a pension adviser offering to review whether a defined benefit (salary related) pension is worth transferring elsewhere, typically to a private pension where the value can rise and fall. Whilst this can actually prove a sensible option in certain circumstances, for example if the underlying employer is in financial difficulty, the death benefits are not particularly generous or the recipient is keen to pass on the benefits to non-spouse beneficiaries, the problem relates to how the adviser offers to help. Usually this involves them offering to undertake the often complex technical analysis of the existing pension without any charge at all but (and it’s a big but!), if the transfer goes ahead, the adviser would take a large percentage fee. With transfer values from salary related pensions often running into many hundreds of thousands of pounds, a 5% charge on a £250,000 pension would cost the individual £12,500!
So, the adviser in question would either advise the individual to leave the pension where it is and receive nothing whatsoever, or they would recommend a transfer with the prospect of receiving £12,500. As you can see, there is a very obvious conflict of interest there and finally the regulator has acted after investigating too many cases of poor practice.
FCA interim chief executive, Christopher Woolard, said: “What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market. Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards.”
We have only ever offered defined benefit pension advice to clients on a more transparent basis. We charge for our time to investigate the options and will therefore be paid whether the most appropriate outcome is to leave the pension where it is or to transfer it elsewhere. If a transfer is the right choice for the client, we will charge a small additional amount to reflect the administration costs involved and the potential liability risk associated with this particularly litigious advice (where many firms choose no longer to participate).