DB pension transfers – a two stage process to make filtering simpler

15 April 2019

contingent charging

It’s mandatory for DB pension scheme members to prove they’ve received advice, in most cases, before they’re allowed to transfer out. But DB pension transfer advice is difficult. It’s arguably the most complex, time-consuming, and risky type of advice that most financial planning businesses offer. A two-stage advice process could help overcome the triage and contingent charging conundrums and deliver a far better customer outcome.

Many consumers considering a transfer aren’t used to paying for financial advice and come from normal, modest backgrounds. So, it’s no wonder that some baulk at paying an adviser several thousand pounds for compulsory advice they may not really want. Assuming they’re willing and able to stump up the hefty fees for advice, what ‘result’ can they expect for their money? Quite possibly a recommendation to forget about transferring and remain in the DB scheme, in line with the FCA’s guidance that a transfer remains unsuitable for most people, even taking account of the flexible retirement income and death benefit options now available.

Firms have attempted to mitigate the impact on clients of expensive DB pension transfer advice in one of two ways – contingent charging or triage process

Contingent charging

With contingent charging, the client pays nothing for the advice unless the recommendation is to transfer out of the DB scheme, the client accepts that advice and is implemented by the firm. The cost of the advice, let’s say £5,000, is then deducted from the pension fund after the transfer takes place.

It’s generally recognised that using contingent charging for complex and contentious DB pension transfer advice is a very bad idea, because of the obvious and major conflicts of interest involved. Despite this, the FCA has decided against banning it for the time being, much to the dismay of (among others) Frank Field MP. He has launched an investigation, in his role as Chair of the Work & Pensions Select Committee, which aims to find the evidence the regulator says it needs that contingent charging leads to poor advice.

Triage process

So, contingent charging for DB transfer advice is a problem. It’s not a valid solution, and its days are surely numbered. But, what about triage? Before the FCA got involved last year, triage was generally taken to mean filtering out people who were clearly unsuited to a DB pension transfer, before any significant time or effort was spent by the firm. These clients probably didn’t need to pay anything to be told that they were not viable candidates for a transfer!

The FCA has pointed out that advising people not to transfer based on their individual circumstances amounts to a personal recommendation; and changed the rules to require a suitability report in this situation. The regulator’s guidance makes it clear that any non-advised triage process must be limited to educating potential clients in a generic and balanced way about the pros and cons of transferring out of a DB scheme. This means that the firm can’t take the client’s personal circumstances or objectives into account. Nor can they express an opinion about whether a transfer might be a good idea for that client.

Impartial educational material can certainly be helpful – some firms use videos for this purpose. But a generic process in isolation is unlikely to be fully effective in screening out people who are clearly not suited to a DB pension transfer. What’s likely to be more effective is an initial filtering process that’s personalised to take account of clients’ individual circumstances and objectives. Some might say that the FCA’s personal recommendation rule prevents this from being a viable solution. But the Regulator is on the client’s side.

There are signs in the commentary in PS18/20 that the FCA sees the benefit of avoiding time-consuming and expensive regulatory hoops, which deter firms from filtering out clients that are unsuited to a DB pension transfer. It’s obvious it’s a good idea to identify such individuals as early as possible, so the costs passed onto them can be minimised. For example, the FCA’s policy statement refers to the written confirmation of a recommendation not to transfer as an ‘advice confirmation’ rather than as a suitability report, which hints that a lengthy letter should not be necessary.

The commentary also says, ‘it may not be necessary to undertake an extensive analysis to determine that a transfer would be unsuitable… the report may show only that information that is needed to allow the personal recommendation to be made.’ This is reflected by the latest COBS rules, which require a suitability report to include only the advantages and disadvantages of the recommendation (and not the outcomes from an APTA), when recommending against a transfer.

Looking forward: A two-stage advice process

There is an opportunity for firms to help clients avoid unnecessary costs by using a two-stage advice process for DB pension transfers. The first stage could involve asking clients to complete a bespoke questionnaire about their pension-related objectives and financial circumstances, perhaps followed by a discussion to validate the responses and plug any crucial information gaps. This process should identify individuals who are clearly unsuited to a transfer. The adviser could then write a short letter (or email) explaining the reasons why. This letter could be less than a page long. Clients who ‘pass’ this initial filtering stage could proceed to (and pay for) the full DB pension transfer advice and analysis process.

Introducing a new advice process always has its challenges, and it will probably take some trial and error to get the filtering stage working effectively and smoothly. But contingent charging doesn’t work. When it comes to delivering good outcomes to clients and less risk for your business, two stage advice has got to be a better bet.

Get in touch with our team below to find out more.

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