UK’s FCA Proposes Ban on Contingent Pension Transfer Fees

The UK’s Financial Conduct Authority (FCA) has released a package of pension-related proposals, including a ban on contingent charging for pension transfer advice in a move aimed at eliminating financial adviser conflicts of interest.

When the so-called “pension freedoms” were introduced in 2015, the government’s intensions were to give consumers with defined contribution (DC) pensions more flexibility in how and when they could access their pension savings.

But the pension freedoms also gave consumers more complicated choices over how to invest their pension savings, and when to draw on them. So the government created a mandatory advice requirement to prevent members of defined benefit plans from transferring against their own best interests.

However, the FCA said it is concerned that too many of these advisers have been delivering poor advice, much of it driven by conflicts of interest in the way they are paid. It cited the practice of contingent charging – where advisers only get paid if a transfer proceeds—in particular as creating “an obvious conflict.”

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The FCA said that in some cases financial advisers were receiving ongoing fees for pension transfer advice for as long as 20 to 30 years following a transfer. The regulator said it is concerned that such a lucrative incentive could compel advisers to recommend a pension transfer when it may not be in their client’s best interest.

The FCA has proposed that advisers be required to demonstrate why any plan they recommend is more suitable than the consumer’s workplace pension plan. It is also consulting on the following proposals:

To ban contingent charging, except for groups of consumers with certain identifiable circumstances that mean a transfer is likely to be in their best interests
Where contingent charging is permitted, advisers will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent
To introduce a short form of “abridged” advice that can result in a recommendation not to transfer based on a high-level assessment of a client’s circumstances. This will fall outside the proposed ban on contingent charging and should help maintain initial access to advice

Additionally, the FCA has published a feedback statement on its discussion paper on effective competition in non-workplace pensions, and said it found that many consumers are not engaged in pension decisions, and are not aware of charges they are paying. It said products and charges are often too complicated to compare, which leads to a lack of price competition.

The regulator has outlined a package of potential measures to protect consumers that include potentially requiring providers to offer one or more investment solutions, reducing charge complexity, and increasing transparency so that consumers better understand the impact of fees on their savings.

“The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market,” Christopher Woolard, the FCA’s executive director of strategy and competition, said in a statement. “We want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.”

The FCA consultation will run until Oct. 30.

Tags: fees, Financial Conduct Authority, Pension, Pension Transfer, UK

The 100 largest US public defined benefit pension plans saw a $50 billion jump in funding in the second quarter of the year, which caused its funded ratio to rise to 72.2% from 71.0% the previous quarter, according to consulting firm Milliman.

Milliman attributed the increase to solid aggregate investment gains of 2.66% as estimated returns ranged from 1.33% to 4.39% for the plans, which have now mostly recovered the investment losses they suffered during the final quarter of 2018.

“Public pension funded ratios are basically back where they were a year ago,” Becky Sielman, author of the Milliman 100 Public Pension Funding Index, said in a statement. “But over the past 12 months annualized returns, at 6.0%, fell short of long-term expectations. It’s good to remember that investment horizons for these plans are measured in decades, so short-term fluctuations are something plan sponsors have to live with to reap long-term rewards.”

The overall annualized return for the 12 months ending June 30 is slightly under 6.0%, which falls short of most of the plans’ expected long-term earnings assumptions. The aggregate asset value rose to $3.789 trillion at the end of the second quarter from $3.697 trillion at the end of the first quarter. The plans gained investment market value of approximately $119 billion, which was offset by approximately $27 billion flowing out, as benefits paid out exceeded contributions coming in from employers and plan members.

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The aggregate deficit for the plans fell to $1.458 trillion at the end of June from $1.508 trillion at the end of March. And the total pension liability (TPL) for the plans continues to grow and was an estimated $5.247 trillion at the end of the second quarter, up from $5.205 trillion at the end of the prior period.

As the plans’ funded ratios moved higher, three plans moved above the 90% funded mark to bring the total to 17 plans that currently stand above the threshold, compared to 14 at the end of the first quarter. Meanwhile there are 28 plans that have funded ratios below 60%, and nine plans are below 40% funded.

The results of Milliman’s Public Pension Funding Index are based on the pension plan financial reporting information disclosed in the plan sponsors’ comprehensive annual financial reports.

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Tags: Defined benefit (db) pension plans, Milliman, Pension