This morning’s headline in the Daily Mail is that millions are being tricked out of their “gold-plated” cash by the lure of upfront cash in hand. A KPMG report, a precis of which can be found here sets out to prove that ETVs are now a mainstream product used by a high proportion of the Gold-Plated schemes in question to keep them solvent.
If I was Mike Smedley, a KPMG partner promoting the report I’d be surprised that it had made front end news and more surprised for reasons that were incidental to the findings I was promoting.
But there you are, memories of pension mis-selling are long and any story that suggests the Daily Mail’s core readership – who are the golden generation benefiting from defined benefit pensions – are the passive victims; is going to be promoted by the Mail’s editorial team.
People have been able to take transfers from defined benefit pension plans is they are insistent enough (these days you have to prove yourself a financial kamikaze). The point of ETVs (Enhanced transfer values) is that they sweeten the poisoned pill but be assured, there is no such thing as a free lunch. The advantages of ETVs are based on assumptions on what will happen in the future – especially what will happen to stock markets, inflation and interest rates. If you are comfortable that the assumptions haven’t turned out that way over the past ten years.
- Stock markets have fallen and not risen over the last ten years – assumptions assume steady growth of at least 5% pa
- Interest rates have fallen consistently over the past ten years and show no immediate sign of increasing.
- Meantime inflation has proved volatile and so do predictions of its future rate.
Of one thing we can be certain – uncertainty. Unless you are in a defined benefit pension plan that is. Short of your pension scheme going bust (when a bailout fund exists to protect the majority of people’s pensions), you can feel certain of getting a pre-determined retirement income which is protected against stock market volatility and the impact of rampant interest rate and inflation hikes.
Since the vast majority of your financial assets are “at risk” including your income, the value of your house and the value of your savings, the promise of defined benefit pensions (including state pensions) is all the higher. Like marriage it is not something to be taken lightly.
Taking a transfer value means giving up that certainty and trusting to assumptions on markets inflation and interest rates against which you have little protection (unless you want a guaranteed loss).
Nevertheless , individuals need to have choices. Let’s look at a few scenarios where people might find themselves better off having their pension paid privately and not from a company pension scheme
- If you aren’t in the best of health and able to get more pension from an “impaired” or “enhanced” annuity – this will probably be the case if you are a heavy drinker or smoker,
- If a large part of your defined benefit is spent on providing benefits to your family – if you don’t have a family.
- If a large part of your defined benefit is spent on providing you with increases in your pension when you’ve worked out you don’t need an increasing pension.
In all these cases, you may feel you get a private pension than the pension you’ll be getting when your take your benefits from your company scheme.
The key word being “when”. There’s a strong argument that the time to be making choices about opting out of your company pension is not at some random point when an ETV exercise is underway (buy now while stocks last – hurry only x working days till offer ends!). Instead it’s the point when you retire.
When you retire you are properly focussed on your financial planning for the next stage in your life, you are able to take decisions on the basis of what you have (not what someone assumes you are going to have) and most importantly, you can take decisions in your own time without pressure (Assuming that is you start thinking about these things in advance of you actually leaving your employment).
We’re working with some of the great annuity advisers in the UK to develop services not just for those retiring from Defined Contribution Plans but from Defined Benefit plans too. From the perspective of the Trustees and the sponsors of the DB plans (the employers), the advantages offered by de-risking persist through retirement, theoretically companies can benefit from members moving to private pensions for many years after retirement (though they of course dwindle).
Of course people need to be cautious. As I’ve said many times on here, private pensions are inherently less efficient than the pensions paid directly from company schemes and the “efficiency gap” is still far too wide.
But private pensions are catching up and my firm First Actuarial are doing everything we can to closing the gap faster and more completely.
And of course , de-risking doesn’t need to involve people taking out private pensions. The options to swap one type of pension for another (increasing for level for instance) can be managed using Scheme Pensions (I wrote about this last year in a spookily similar blog).
The Daily Mail is of course right in warning people not to be influenced by cash bribes when giving up valuable “gold-plated” benefits. However, the choice of how your pension is paid to you and the bet you take on your life expectancy are your choices and your bets.
I reckon there are three important matters that need to change
- People should take decisions when they are properly focussed on the impact of their decision-retirement
- People should not give up guaranteed benefits unless they are totally sure about the assumptions used to calculate future “non-guaranteed” benefits
- The decisions people take should not be based on special offers including short-term cash incentives which necessarily skew rationality.
- What to do with pension trustees (henrytapper.com)
- Should employers be bothered about their pensioners? (henrytapper.com)
- The importance of saving into a pension early (justsave.co.uk)
- Scheme Pensions aren’t the magic bullet -yet (henrytapper.com)
- Money makeover: Almost 30 and no pension (confused.com)
- Pensions on the mend as rates rise (moneyville.ca)
- DC Trustees still valued but they need to raise their game (via Henrytapper’s Blog) (henrytapper.com)