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The conflict of interest around pension transfers

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Going back 40 years, most employees were members of defined benefit pension schemes.

Things have certainly changed. Access to defined benefit schemes has dropped significantly, while the proliferation and membership of defined contribution schemes has soared.

In April 2015, the pension freedoms liberated funds by offering individuals easier access to their savings from age 55 onwards. Rather than having to purchase an annuity, an individual could simply withdraw their entire pension fund in one go.

But given that the pension freedoms only applied to define contribution schemes, this unfettered access (combined with very generous changes to the taxation of death benefits), increased their attractiveness.

Many people in defined benefit schemes eyed the freedoms and estate-planning qualities of defined contribution schemes with increasing envy, particularly as the transfer values available from defined benefit schemes rose to an all-time high. It was not uncommon for them to run to six, even seven-figure sums for the over-55s, with the promise of full access to those funds once they had been transferred into a defined contribution scheme.

Unsurprisingly, a transfer industry grew exponentially, with regulated financial advisers required to advise anyone with a pot worth over £30,000. As to how an individual pays for that advice, which can run to several thousand pounds, some advisers offer a method called contingent charging, where the individual only had to pay for the advice if a transfer to a defined contribution scheme was recommended.

Although this method offers cash-strapped individuals an emotive-driven means of accessing their pension fund, once transferred, it also raises a potential conflict of interest for the adviser. If they say “no, don’t transfer”, they don’t get paid. But if they recommend that the transfer should go ahead, the receiving defined contribution provider pays the adviser whatever fee has been agreed.

The volume of transfers since 2015 — most notably, those involving members of the British Steel Pension Scheme — has resulted in the FCA calling for a ban on contingent charging. Indeed, contingent charging should have been outlawed years ago. 

The number of individuals who have succumbed to pension scams by transferring out of defined benefit schemes, and the amounts lost to scammers, is frightening. 

Pension transfer advice should be paid for, regardless of whether the recommendation is to transfer-out or not.

Although a contingent charging ban may result in far lower transfer activity, it should hopefully precipitate the protection of pension benefits for those who may be reliant on their defined benefit scheme to maintain their standard of living in retirement.