DB transfer and Contingent Charges = Behavioural Risk



Message FROM the FCA: Contingent Charges = Behavioural Risk

Message TO the FCA: By the way… so does Pension Freedom

Definition of Contingent = “depending on something else in the future in order to happen

Dear Advisor:

The FCA wants you to say “No” to DB transfers. Whether it is 6/7, or 9/10, a client walks in the room, excited about the possibility of moving their DB pension, and you say (not harshly) “No”, or if you’re a good and trusted individual, “Sit down, let’s talk about it..”

The good news is that the FCA wants you to impose a time/material fixed rate charge based on sensible value (for these services) for taking this decision (almost all the time). It wants you to give the client either a rudimentary (low cost) or thorough (higher but reasonable cost) investigation that explores all forms of your client’s current situation, and future possibilities (excluding black swan events), and then concludes (almost all the time), that their Defined Benefits needs to stay as it is.

Your client, who generally comes to you with a problem in need of a solution, will be a bit perplexed by both your engagement process, and probably also by the commercial model that sits alongside this.  They might get a bit angry, potentially persistence, and possibly, god forbid, insistent. They might want to explain to you that they are the exception to the rule or are just following the path of others. Further, they might actually argue that they have no “intention” of giving up or cashing in any amount of their pension, but rather crave some form of control, and shared responsibility with yourself, generating the hope of a better retirement outcome for themselves and on-going fees for you.  It sounds like the ideal outcome, a win/win TCF situation, but alas, most of the time (almost all the time), wrong; imprudent, misinformed, and misbehaved.

I’ll stop here for a moment.. and say “I get it Mr. Regulator”. You have clearly recognized that contingent in the context of a commercial outcome “frames” all the wrong type of behavioural risks. It clearly makes it a lot easier to agree with the transfer hopeful if their intention and your commercial desire are aligned, and thus needs to be addressed. Furthermore, if the vehicle that will bear the brunt of the delivery for the outcome, namely the SIPP, has a potential to become a “really hot” potato for the customer, all the more reason to “nip things in the bud” before a leaky faucet might become something much worse (as PI costs and FSCS levies already fear).

But let’s also recognize that this draconic, dogmatic type approach is forgetting an important thing, namely what the client may think they want, and what may also be right (more times than you think), especially given the uncertain macro picture we find ourselves having lived through for the last decade or so.

In particular, while I couldn’t be more in favour of the creation of excellent best practices, the role of triage and of specialists, and even committees to act as gatekeepers to ensure truly the “deserving” get the outcome they want (though I do worry about the cost impact), advisors need a lot more help to read the behavioural signs coming into their presence, and have the tools to respond appropriately to these. Further, they need assurance that customers clearly understand that, unlike almost any other activity that might be undertaken, the advice process will need to begin with “an almost universal, No” and will probably end that way (no matter who the client turns to, even a D2C platform with their own SIPP).

Education needs to be mandated into the DB schemes themselves to explain (or not) the true value of guarantees and benefits, and thus mitigate (to some extent) behaviours that spring from mental accounting, information bias, and attentional bias (to name but a few potential ailments). Advisors need in turn to equip themselves to understand the present bias condition and associated biases they face to arrive at the right type of advice, and the different types of ways of determining the options (when they exist).

The FCA is asking for consultancy now, and hopefully this will not only include focusing on the advisors and the advice firms, but all the other actors that have a role to play in the DB market and the creation of the event itself.  These actors can have as much influence on the client as anyone else, long before they step into the room.