Plans that could see pension advisers face higher regulatory fees this year have provoked an outpouring of angry comments from RP readers.
This month’s Inquiry followed a report published by the Financial Services Compensation Scheme (FSCS) warning that claims linked to life and pensions are expected to cost much more than previously thought.
The statutory compensation scheme said claims are now estimated to total £136m for 2016-17 – an increase of 39% from its previous £98m forecast. It leaves the life and pension advice section with a deficit of £28m.
The report said it is likely life and pension advisers will face a supplementary levy to make up the shortfall.
The problem stems from a rapid growth in claims relating to advice on self-invested personal pensions (SIPPs). The FSCS said some advisers had given poor advice to move money from occupational pension schemes into SIPPs and then subsequently put that money into high-risk, unregulated investments.
The number of claims relating to SIPPs has rocketed by 59% year-on-year. Claims have been made against 171 firms, yet four of those accounted for 73% of the compensation paid. A further 167 firms accounted for the remaining compensation.
Paying for others’ crimes
RP asked advisers if it is fair that pension advisers will have to pay a higher FSCS bill this year. A clear majority (67%) answered “no”, 16% said “yes” and 17% were unsure (see chart 1, above).
One reader argued that competent advisers should not have to pay for the mistakes of incompetent and dishonest advisers, adding: “It means our charges have to include a loading to compensate. A levy on the product would be fairer as it would mean all clients in that area would contribute, even though the amounts may not reflect the actual risk due to the historic nature of claims.”
Another reader agreed, stating: “I have never had a claim against me in 15 years of giving advice. I am highly qualified and don’t believe I have ever misadvised anyone. Why should I pay thousands for the crimes of others?”
Some readers questioned the logic for allowing esoteric investments to be sold through SIPPs. Investments that featured in claims to the FSCS included hotel rooms in the Caribbean, storage pods and plantations of oil producing trees in Asia.
“Claims nearly always come from non-regulated products being ‘sold’ through SIPPs. Why is this still allowed?” one survey respondent asked.
Another said: “If losses were caused by the investments within the SIPP, then recovery should come from them.”
Of those who answered “unsure”, one reader suggested the advisers responsible for a higher number of claims should pay a proportionately higher bill.
Although many of the claims to the FSCS resulted from people’s money being moved from occupational pension schemes into SIPPs, advisers don’t believe this is necessarily a bad decision.
RP asked whether moving from an occupational pension into a SIPP is ever a good idea and an overwhelming majority (86%) said “yes”. Only 5% answered “no” and 9% were unsure (see chart 2, above).
One reader said there are plenty of situations where moving from an occupational environment is more than justifiable – and is almost a necessity. However, the reader added that it depends on the individual’s circumstances.
Advisers highlighted the main benefits of SIPPs as being greater flexibility and control, death benefits and the product’s place in inheritance tax planning.
“A single person with adult beneficiaries in poor health would almost always be better transferring,” one reader said.
However, another adviser said transferring is rarely a good idea, but exceptions exist. He added: “I would not be willing to advise due to concerns regarding possible future claims.”
An adviser who answered “no” argued that SIPPs have limited appeal to a niche market: “Most will not need the facility they offer and therefore the charges generally cannot be justified over and above a standard personal pension plan which has access to many funds at a lower cost to the client.”
A reader who answered “unsure” said the only occasions when transferring is likely to be a good idea are if there are concerns over the financial state of the occupational scheme or the client wants more control over their retirement options and death benefits.
RP asked readers what should happen to advisers who invested their clients’ money into high risk, unregulated investments which subsequently failed.
A third (33%) said the adviser should be struck off, while 24% said they should pay the entire FSCS bill. About 12% answered “nothing – the client knew the risk” and 31% said “other” (see chart 3, above).
Of those who thought advisers should be struck off, one said: “There is never a good reason to put clients in such a scheme and any adviser who thinks otherwise needs to leave the industry now.”
One reader who thought advisers should pay the whole FSCS bill said: “If advisers have invested the money, then they should know the risks. The history books are littered with classic examples of failed unregulated investments.”
Readers who answered “other” suggested there should be a mixture of all of the above, depending on the case’s individual circumstances.
“It depends on whether the clients knew what they were getting into (in which case, tough) or were misled (in which case, advisers need to be struck off),” one adviser stated.
Even though readers are unhappy about the FSCS levy, 55% described the volatility of levies as “just something I have to accept”. A further 35% said “it is very difficult to budget and plan ahead”, while only 3% were worried they could go out of business (see chart 4, below).
Of those who said it’s difficult to budget, one stated: “When it quadrupled a couple of years ago, I was absolutely astounded that it was legal to charge the amount I was being invoiced.”
Another reader took a more optimistic view: “While nobody likes increased levies, pension flexibility has brought more work. Hopefully, one will outweigh the other.”