MPs examine 'contingent charging' for pension transfer advice

A House of Commons committee is to investigate 'contingent charging' on pension transfer advice, following concerns about potential conflicts of interest.

Under a contingent charging arrangement, pension savers agree to pay their financial adviser, or pay them much more, only if they decide to take their advice to transfer out of a defined benefit (DB) pension scheme.

MPs on the Work and Pensions Committee are concerned that such agreements give financial advisers an incentive to encourage clients to transfer, even if this may not be the best course of action.

According to the Committee, over 100,000 people a year are taking a DB transfer on the back of potentially bad advice.

The issue arose after an earlier inquiry into pension freedom and choice uncovered evidence about the financial advice given to members of the British Steel Defined Benefit Pension Scheme (BSPS).

Before the BSPS wrapped up, its members had to decide what to do with their pension pot. One option was to get their pot valued and transfer it into a defined contribution (DC) pension.

Savers with DB pension pots worth more than £30,000 must take financial advice, because transferring to a DC scheme is not usually the best option. However, the Committee's report found that many BSPS members were given bad advice and took a DB transfer when it was not in their best interests.

The Financial Conduct Authority said in October 2018 that there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes, and that further analysis of the issues is necessary.

PIMFA, a trade association for the personal investment management and financial advice sector, warned about the risk of "unintended consequences" if contingent charging were to be banned.

"Removing contingent charging without a viable way for individuals to access advice will ultimately turn people away from an absolutely indispensable part of the retirement planning process," said Simon Harrington, senior policy adviser at PIMFA.

A ban is likely to push clients towards poor advice options that lead to a transfer "regardless of their circumstances", he added.

Echoing those comments, Steven Cameron, pensions director at Aegon, said that regulatory policy should not be "based on stamping out isolated instances of bad practice, particularly if this could constrain how the vast majority of professional advisers serve their clients."

And he warned that an outright ban on contingent charging should be a last resort as it would "exacerbate the advice gap".