Here is a statement from an article in “Money Observer”
“We have seen a number of large schemes, including British Airways, RBS and Scotia Gas Network (ex British Gas), make quite large downward adjustments as volumes of transfers increase typically 10-15 per cent. We think this is a function of the obligation on trustees not to pay out at rates that makes the funding worse for those who remain.”
The statement’s made by Tideway Investment Management’s James Baxter and it is quite wrong. As Baxter holds himself out to be head of “Private Client Advice”, this should set alarm bells ringing.
Trustees have no powers to control the way Transfer Values are calculated. They are calculated according to a best estimate of the value of the benefit given up. The value only varies with regards the discount rates agreed with scheme advisers (actuaries) and these are established every three years. Trustees do not meddle with transfer values.
They can enhance transfer values, but they cannot depress them – as the article suggests-to control flows. Where a scheme is in deficit it can reduce all transfers to reflect serious under-funding. This is following the commissioning of an insufficiency report. Issuing an insufficiency report on a scheme is a major operation and is rarely applied. You can read how hard it is in this detailed guidance from the Pensions Regulator. (sections 34-47) http://www.thepensionsregulator.gov.uk/guidance/guidance-transfer-values.aspx
If the schemes mentioned by Baxter have done so, this is the first I have heard about it.
In any event, it is not right to suggest that Trustees control CETVs using some actuarial mixing desk. It implies a “buy now while stocks last” approach to CETVs which is the opposite to the rational decision making which people should be making. I have heard similar comments from others that should know better.
Most prominently Ros Altmann famously told delegates at a recent FT transfer conference that members should press Trustees for better transfer rates – as if CETVs were negotiable. They are not.
Insistence that Trustees apply discretion on transfer values is wrong;
- It implies that members can negotiate their CETVs – doing so is fruitless – it doesn’t work
- It implies that trustees can – with agility – use CETVs to improve scheme funding – they cannot alter CETV pay-outs – other than through extremely clunky insufficiency reports.
- It ignores the very complex set of member protections which – in my experience – are scrupulously applied by trustees and their advisers.
- It frightens DB members into becoming investors for the wrong reasons
Those who suggest otherwise are doing occupational pension schemes and their integrity a great dis-service and are creating a false market in transfer values. They should be called out. I am calling out Tideway Investment Partners for just this.
The provenance of Tideway
Tideway’s name keeps coming up in conversation , so I was interested to see a presentation from them appear in my inbox, excerpts from the presentation delivered to City of Westminster delegates to its DB to DC transfers conference on May 23rd are included below.
Tideway is a major player in CETVs – having released £500m from DB Schemes
Unless you consider following the herd an end in itself, these are not credentials – but marketing statistics.
Tideway herd those who are driven by its marketing to investment solutions
The vast majority of these solutions involve Tideway Investment Management.
And what is driving all this? TAX?
And maybe “sales”; this is taken from Tideway’s “Guide to Final Salary Transfers”.
If Tideway don’t get you to transfer, you don’t pay them a fee. You can draw your own conclusions as to the behavioural bias’ this can create.
A sales bias is endemic in Tideway’s culture
I am deeply sceptical about Tideway’s tax-driven approach, not least because of its Final Salary Transfer Guide which I have provided a link to at the bottom of the page. As can be seen from yesterday’s blog on the PPF v Private Scheme Benefits, the calculation of tax free cash from occupational schemes deserves deep analysis, not the facile and misleading calculations offered in the slide above – or indeed in the guide.
Returning to the City and Westminster presentation, there follows three “Monopoly” slides showing how transfers generally benefit the rich (wealth preservation), middle England (personal empowerment) and the poor (financial windfall). The presentation ends with a very woolly checklist.
Should half a billion pounds of carefully nurtured DB investment be flowing through Tideway’s Private Client Advisors into Tideway’s funds? I am very sceptical.
A report in today’s FT suggests that an increasing number of people still accruing defined benefits are stopping accrual voluntarily and taking their money. I am very sceptical this is in their best interests.
How do we test people’s “appetite and capability” to manage extra risk and responsibility in advance? What qualification is in place to show they have this capacity?
How can people understand their planning objectives for later life when they have such a weak comprehension of what retirement will look like?
And what helps us understand that people have a “capacity and willingness to give up guarantees?”
Tideway creates a climate of fear and mistrust in the motives of Trustees. This allows questionable calculations about tax, future liabilities and investment returns to go unquestioned.
The hype being generated by Tideway’s Baxter, both in the Money Observer article and in the slides delivered to the City of Westminster Conference is what caused trouble in the early days of personal pensions (1987-2000).
The system that is in place to produce CETVs is finely tuned to fairness, there are cases where transfers are the best option. Good advisers can explain complicated issues surrounding discount rates, insufficiency reports, early retirement and tax-free cash commutation. Members can take informed decisions and “cash out”.
But they are ill-served by the comments I am reading from James Baxter. I fear that he is not the only Private Client Adviser with limited understanding of defined benefits and an over-inflated sense of value in his own investment solutions.
Money Observer article; http://www.moneyobserver.com/our-analysis/pension-dilemma-659000-today-or-22000-year-life
Pension Regulator guidance on how to calculate CETVs; http://www.thepensionsregulator.gov.uk/guidance/guidance-transfer-values.aspx
FT article on active members transferring living funds; https://www.ft.com/content/4c94c112-3f96-11e7-82b6-896b95f30f58
Tideway’s guide to Final Salary (why not “defined benefit”?) transfers. https://www.finalsalarytransfer.com/Uploads/1435150910Tideway-Guide-to-Final-Salary-Pension-Transfers.pdf