Trustees must go the extra mile for their members on transfers

On the one hand, they don’t want to encourage members to do something that is unlikely to be in their best interests, by making the availability of transfers too well known.

Conversely, they don’t want to discourage transfers, as they want members to be aware of all their options and make the best decision for their particular circumstances.

Trustees and scheme managers must get off the fence and actively support steps to make transfers safer for their members

However, a brewing mis-selling scandal in the DB pension transfer market has increased pressure on trustees to be decisive on the transfer issue.

Pointing members towards advice is not enough

Employers, trustees and scheme managers have strongly advised members to seek professional advice on what can be the most significant financial decision they will ever make.

Indeed, any member wanting to shift a fund worth more than £30,000 is required by law to obtain independent financial advice from a professional. But worrying evidence is emerging that much advice has been poor or plain rotten.

The Financial Conduct Authority recently found less than half the transfer recommendations it reviewed were suitable.

Those members wrongly advised to give up valuable pension rights cannot turn the clock back and must now live with the risk of managing their own defined contribution fund.

A dark cloud now hangs over thousands of transfers and with it the industry that facilitated the flow of billions of pounds out of DB schemes.

Contingent charging is flawed

With a pension scandal unfolding, MPs are now pushing the FCA to consider ways to make the market safer, including a ban on charging structures offering unhealthy incentives to advisers to recommend unsuitable transfers.

It is here that trustees and scheme managers could take decisive steps to do better for their members.

Schemes will be aware of issues with contingent charging, a ‘no transfer, no fee’ model that sees an adviser only get paid if their client acts on their recommendation.

The FCA has acknowledged that contingent charging can incentivise an adviser to recommend a transfer that may not be right for their client, as well as recommend products where ongoing advice charges can be deducted.  

Even worse for the member is that advice paid for on a contingent basis is typically more expensive than paying up front, due to members who do transfer cross subsidising the costs of those who don’t transfer.

For these reasons, the use of contingent-charging IFAs in the workplace is not encouraged. When an employer appoints an IFA to provide members with transfer advice, as part of that process, a code of practice says they cannot be paid on a contingent basis.

While contingent charging is seen as too risky for members in the workplace, the other cheek is turned when the same member accesses advice on the high street, via a ‘no transfer, no fee’ model.

The inconsistency in this position is increasingly hard to justify.

Schemes can help members

With the FCA reluctant to outright ban contingent charging, there are steps trustees and scheme managers could take to make transfers safer for all members.

One option is for members to given the flexibility to deduct the cost of transfer advice directly from their DB pension rights. Advisers would be able to offer advice on a non-contingent, or upfront fixed-fee basis, which would remove any potential conflict of interest at that point in the process.

Members – who won’t have to dip into their own pockets, or borrow, to pay up front for fees – can explore their retirement options in a less conflicted setting.

Many schemes are already offering members the option to pay for tax bills, related to their pension, in this way.

However, tweaks to legislation are likely to be needed for DB schemes to deduct advice costs. The government will need to know there is backing within the industry for this change.

Some may not support ‘scheme pays’ arrangements for advice costs, because of the extra administrative burden it will create. This is a legitimate concern, but as more transfer advice is paid for in this way, the industry has the opportunity to become more efficient at processing requests.

While this solution won’t eradicate bad advice, it is a positive step towards reducing the risk of members receiving inappropriate transfer recommendations and making decisions they will later regret.  

On this basis, trustees and scheme managers must get off the fence and actively support steps to make transfers safer for their members.