Tim Sargisson: Time to dust down the handcart
The problem with many DB transfers reviewed by the FCA is that advice has become no more than a process, says Tim Sargisson – its provision industrialised and with little real understanding of the needs of the client
I have no idea from where the expression ‘going to hell in a handcart’ originates but it certainly seems an appropriate one to employ in the context of the latest findings by the Financial Conduct Authority (FCA) on pension transfer advice.
Published on 6 December, the findings again make for depressing reading and catalogue a litany of failures on the part of the advice industry. The FCA remains concerned that firms are still failing to give “consistently suitable” advice despite providing adequate feedback in the past.
I was staggered to see the numbers showing that, since 2015, 18 firms have given advice to 48,248 clients on their defined benefit pension (DB) schemes, resulting in 24,919 actual pension transfers. If you work that out, it represents an average of 2,680 cases per firm. Over three years, that is 893 transfers a year, which averages out at around three cases a day.
What is wrong here, essentially, is that advice becomes no more than a process – its provision is industrialised and there is little real understanding of the needs of the client.
There is nothing wrong with this approach in terms of simple products – however, there is a world of difference between advising on a DB transfer, where getting it wrong provides for poor outcomes. Remember at the heart of this is a client. In other words, 24,919 individuals who rely on us for safe passage to navigate their way through many years of retirement.
This isn’t the same as a phone call to Beagle Street to sort out a bit of life assurance to make sure the family is OK if we drop off the perch. So why do firms feel it appropriate to deal with pension transfers in a similar way? Furthermore, why do firms consistently fail to heed the previous warnings from the FCA in these areas and continue to create a systemic risk for everyone in the industry?
I cannot answer for the firms involved – however, I do believe that, at its core, is a complete lack of alignment of outcomes among all the interested parties, which allows for risk to break out all over the place. From the client, there is the belief it is their fund and they should be free to do what they like with it. Seduced by eye-watering numbers and talk of Lamborghinis, they want it – and want it now.
‘3% + 1%’ at stake
The need for advice provides the opportunity for the ‘expert’ to act as the gatekeeper but there is ‘3% + 1%’ at stake here so is it any surprise more than half of the 48,248 clients ended up with a transfer?
Finally, the fund management groups. Some years ago, I read a report that talked about the opportunities for this sector following the demise of the institutionally-priced DB funds, as they moved across to the more expensive retail class as the use of defined contribution schemes took off. It can be argued that Christmas came early for this group when George Osborne made his pension freedom announcement in 2014 and they are hardly going to look to apply the brakes.
The response from some is to demand the FCA explain what is required of advisers in undertaking DB transfers and we can then operate within that framework. This is not how it works, though, and we would be wise to understand this.
It is for firms with the requisite permissions to determine what is the right approach and recognise that this will be scrutinised at some point by the regulator. This is one reason why, last month, the FCA sent a data request to every single firm in the market that has worked on DB transfers since pension freedom. It has now revealed it will use the information gathered to start a “wide-ranging programme of activity” for firms.
No doubt this will be painful for some – but then, this whole area will be painful for others as the transfers slowly unravel and the FSCS goes into overdrive.
Published on 18th December