The Work and Pensions Select Committee has called for contingent charging on defined benefit transfers to be banned following the British Steel Pension Scheme (BSPS) transfer fiasco with some advisers being called ‘vultures’. We have to agree but are there others to blame too?
What is ‘contingent charging’?
It is where a financial adviser only charges a % of the transfer value in fees. In short, if the transfer does not go ahead, the adviser does not get paid, possibly leading an adviser to suggest the best course of action is to transfer out, meaning that they will get paid, even if it may not have been in their client’s best interests.
The British Steel pension fiasco
Indian owners of the former 'British Steel', Tata, agreed a £14bn rescue deal with the government, to keep British Steel ‘alive’. As part of this rescue package, the original pension scheme BSPS Number 1 was being wound up and members offered either a newer, lower benefits, pension scheme BSPS Number 2 or even worse with no reply, an automatic transfer to the Pension Protection Fund PPF (the compensation scheme for pension schemes that have gone ‘bust’). The adviser ‘vulture’ issue being that £millions are being transferred out to members own private schemes, some for the right reasons and many others probably based upon poor advice. In addition, BSPS literature, information and administration was poor and certainly not enough information was supplied in a timely fashion to scheme members or to their advisers. For the record, we have advised just one BSPS member alone. The information supplied to us and to members by the pension scheme administrators was and still is a shambles!
How we quote for pension transfers
We have always for all pension scheme reviews and transfers, not offered contingent advice, but advice in two stages, where stage 1 (transfer analysis and feasibility report) is a fixed fee review of whether it is in a client's best interests to transfer or not (this fee is payable whether the advice is to remain in the scheme or to transfer out), i.e. it is not ‘contingent’ advice. We then quote a stage 2 fee, if the transfer out is agreed as the most suitable option based upon both hard and soft facts for a client rather than remaining in the scheme. In the vast majority of such cases, it is usually safer for the member to remain in a defined benefit scheme. This two stage process, in our opinion, is the most ethical and unbiased way to advise any client.
An unbiased advisers view
Yet again, advisers are called vultures. Clearly, there are some vultures but equally there will be some good advisers who do the job properly and advise all clients in a correct, ethical and unbiased manner.
It is interesting that the government and the regulator allowed Tata to ‘water down’ BSPS 1 pension benefits to BSPS 2 or suffer the reduced protection of the pension compensation scheme, the Pension Protection Fund (PPF). The government did this, no doubt in good faith, to save jobs. They did this to protect workers and not necessarily to protect existing pensioners and former workers pensions. Members had a choice, transfer to a less generous pension scheme BSPS 2 (with very sketchy details) or to an even less generous pension protection fund.
Did the government also allow this to prevent the whole BSPS 1 scheme going in liquidation and the PPF picking up the whole liability? Did they allow this to prevent people losing jobs, British Steel closing and, as mentioned already, the whole pension scheme liability falling on the pension protection fund? Has anyone asked whether pension scheme members are confident in a foreign owner continuing to support a loss making business and support a very costly pension fund? Rover Group comes to mind, which ended up with the PPF picking up the pieces. Why did so many members not respond, or indeed made a conscious choice to not respond, so that they will be automatically transferred out to the relative safety of the PPF?
Have successive governments totally ignored the increasing time bomb that is defined benefit pension schemes? Have successive governments cut corporation taxes meaning even bigger company profits but not forced companies to use those tax savings to protect pensions schemes in deficit? Has the government allowed senior executives of large companies to declare huge profits, huge dividends for shareholders and bonuses for executives yet the pension scheme was in deficit? YES THEY HAVE!
Are the Government, the Department for Work and Pensions and regulators now on a ‘witch hunt’ because so much money has either been transferred out to leave BSPS 2 not as viable as it was i.e. there won’t be enough money in BSPS 2? Is there a ‘witch hunt’ because too much liability is now on the PPF as thousands of members failed to respond by the closure deadline and will be automatically transferred to the Pension Protection Fund?
We suggest the blame lies with successive governments and regulators. Yes, there are some ‘bad apple’ advisers out there but there are more ‘bad apples’ in governments, regulators and indeed the sponsoring employer companies themselves that allow schemes to run in deficit. How many more larger employer pension schemes are struggling in deficit despite companies declaring huge profits and bonuses? We have already seen the likes of BHS, Toys R Us, Carillion, British Steel. How many more before the Government will act?