We are about to witness the result of a failure to prepare effectively for the pension freedoms
Even though it happened 40 years ago, I remember my first scooter accident like it was yesterday. I had only bought the bike a few hours earlier and we did not have riding lessons back then.
I had no idea how to corner properly, so when faced with a sweeping downhill left-hander I carried on straight at 40mph, mounted the pavement on the other side of the road and hit a lamp post.
My pelvis was badly fractured and I continue to feel the effects of that crash today. What still stand out for me after all this time are those endless seconds of helplessness before the collision itself, when I knew with certainty that something awful was going to happen but felt powerless to stop it.
A sense of deja-vu hit me the other week, when reading a piece by the Financial Times’ Josephine Cumbo to the effect that Financial Services Compensation Scheme payouts in respect of defined benefit pension transfers doubled to more than £40m in the two years to 2018.
The figures were provided to Blaenau Gwent MP Nick Smith under the Freedom of Information Act. Some of Smith’s constituents in South Wales were affected by the misselling involving former British Steel workers persuaded to switch out of their DB scheme and into much higher-risk funds.
Cumbo quotes data from the Office for National Statistics showing that, in a period of just three years from 2014 to 2017, pension transfer activity grew from £5.4bn to more than £37bn. If she is right, what we are seeing are the conditions for a perfect storm lining up.
At the end of last year, the FCA reported that its initial assessment of files from 18 firms involved in advising almost 50,000 clients on DB schemes, where 25,000 were transferred into alternative pensions, may have resulted in unsuitable advice in 50 per cent of cases. A snapshot, to be sure: only 150 or so transfers from those 18 firms were directly reviewed by the regulator. But anyone who thinks the FCA’s findings were anything less than the tip of the iceberg is deluding themselves.
What is also significant is the time-lag effect. In many of these cases, the victims of misselling – and I am not just talking about Port Talbot here – are almost certainly still unaware of what is happening to their pensions.
They will only find out in 10 or 15 years’ time or longer, as they come up to retirement and discover that the benefits they were expecting do not match up to the reality.
It is easy at this point to blame CMCs for what is happening – and what is likely to continue happening. Yes, many are greedy and insatiable. Yes, some of them will try to “manufacture” claims out of nothing. But the truth is that there is a minority of advisers loading a gun with bullets and somehow expecting it not to be used by a CMC or its clients.
To add to the mix, the work and pensions select committee, chaired by Frank Field MP, will shortly begin taking evidence on the effect of contingent charging in the DB pension transfer process.
Field’s inquiry is almost certainly a case of closing the stable door after the horse has bolted. The committee will find that contingent charging was a major factor, though not the only one, in smoothing the path in many of these transfers.
The FCA, which decided in October it would not ban contingent charging outright, in favour of introducing new rules setting up more hoops for advisers offering a transfer decision, will be rapped over its knuckles by MPs.
None of that changes the fact there are many hundreds of millions – possibly billions – of pounds worth of transfer decisions that are likely to have been flawed and will need addressing in the next decade or so.
What we are about to witness, in agonising slow motion, is the result of a failure to prepare effectively when the pension freedoms were but a glimmer in the mind of the ex-chancellor and his acolytes back in 2014.
What should have happened was extensive modelling of the kinds of behaviours likely to be adopted by some advisers once the liberalisation of the pensions market occurred, with new and much tougher rules in place before the regime changed.
That should have been coupled with much tougher real-time policing to stop those rules being bent, as they were bound to be. None of that happened.
For advisers who have either steered clear of the DB pension transfer market or signed up to the kind of self-directed triage service provided by Money Alive on its Adviser Portal, the fact their focus has always been on good-quality advice will be of scant comfort.
As always, they –and consumers – will pay the price for the cowboys.