The Sunday Telegraph was reporting yesterday that they have found evidence of very high transfer rates in respect of some final salary schemes.
In one case they uncovered, 55% of employees were being advised to switch from a defined benefits pension scheme to a defined contribution/money purchase scheme.
This is worrying because, in most cases, the best advice is to not transfer out of a final salary pension.
Defined benefit pension schemes offer valuable promises. Even in cases where employers are unable to meet their liabilities, the Pension Protection Fund secures a high level of benefits for scheme members.
Whilst there are some valid reasons for transferring from final salary to personal pension, we would never expect to see such a high percentage of employees advised to do this.
One possible reason for this bad advice, which is not described by the Sunday Telegraph, is the method used by pension scheme members to pay for advice.
Unless pension advice is paid for with a fee that is not contingent on transferring pension benefits, the motivation will always be for the adviser to recommend a transaction.
The Retail Distribution Review, when fully implemented on 31st December 2012, will help to drive some transparency into the way in which some financial advisers are remunerated for pension transfer advice. It will not necessarily result in a more impartial advice system.
This is because financial advisers will still be able to work on a speculative basis, only being paid if they recommend a pension transfer. Their ‘fees’ should be clearer on this new adviser charging basis, but the commercial motivation to recommend an inappropriate transfer could still exist.
Anecdotal evidence suggests that some financial advisers are recommending these pension transfers so they can move money into Self Invested Personal Pensions (SIPPs) in order to invest in ultra-high risk Unregulated Collective Investment Schemes (UCIS).
Where bad pension transfer advice is combined with bad investment advice, the pension scheme member stands a very high chance of losing out.
Pension transfers are a very specialist area of financial advice. The Financial Services Authority (FSA) even requires that advisers in this area hold an advanced qualification, such as the G60 Pensions qualification from the Chartered Insurance Institute, before delivering advice.
Giving up valuable final salary pension benefits is never a decision that should taken lightly. The recommendation should only ever be made on the basis of a detailed analysis of the scheme benefits in conjunction with understanding the goals and objectives of the scheme members.
We hope that the Sunday Telegraph is wrong when they suggest a potential £20bn pension misselling scandal has taken place; we fear they might be right.
Photo credit: Flickr/Panegyrics of Granovetter
