That ETV debate in full

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Sometimes people’s comments on blogs are more interesting than the blog itself- this is certainly the case in a blog I wrote last week on  “Enhanced Transfer Values” the thrust of which is that there are better ways to de-rsik defined benefit pension plans than by giving members cash bungs to transfer out theirguaranteed rights.

The comments came from a linkedin group and for those not familiar with linkedin groups here is the comment trail which I publish as it appears.

Henry Tapper  Better ways to de-risk than ETVs?

Certainly we’d be better off avoiding the kind of publicity occupational schemes got in the Daily Mail this morning- what do you think?

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. The KPMG report, a precis of which can be found her…

Peter Flanagan  (Pension Director at IMI)

• I am astonished at the biased reporting of this option. I had the mis-fortune to be off work sick for a day recently and couldn’t believe the number of adverts for quick cash (wonga.com etc) – some of these showed APR’s over 4000% (yes I did get the number of noughts correct). If the alternative to taking a cash incentive from an enhanced transfer value is taking out such a loan who are we or the Daily Mail to say it is a bad idea.

Henry Tapper •Peter

There are a few better ways of borrowing short term than wonga (not hard)..

www.zopa.com

is an interesting organisation- a mutual that lends money from those with capital to those needing it.

Here’s an interesting discussison on Martyn Lewis‘ moneysaving expert site

http://forums.moneysavingexpert.com/showthread.php?t=3030132

I’m really concerned when I hear that people are messing with their pensions for short-term cashflow , surely we can point them towards better forms of finance or have I just put my head in some regulatory noose?

Peter Flanagan • Henry

I wasn’t promoting it as a good idea but this is what people are doing (without screams of protest from the media) – what I was saying is the individual is best placed to understand his/her own finances and for some short term cash is far more important than the actuarially discounted value of their pension.

Henry Tapper • Sorry Peter- I wasn’t supposing you were!

But it begs the question of whether employer are wise in using cash incentivisation for ETVs (and trustee’s to go along with it)

If there is such financial hardship (and/or ignorance) within the workforce, isn’t there a pressing need for some straight talking from HR?

The pensions industry is going to take a real kicking for these cash incentives and the Mail will not be the last to put the boot in.

In my view, employers need to be sensitive to this and to the warnings coming from the DWP and tPR

Peter Flanagan • I disagree – why is financial education an employer’s responsibility? All Db plans have to offer a t/v by law – how can an enhanced t/v be a bad option? Unless the government is wrong to force db plans to provide t/vs. If done correctly (with good communication and financial advice) I believe the provision of an ETV can help members – particularly those being duped by those offerring expensive credit which is a far bigger problem than etvs. That is something for the DM to get excited about – stop Wonga.com now!

Paul Findlay  •  (Head of Annuities at Alico)    Peter
I agree to an extent.

To some, the requirement to buy a car to work or a deposit for a roof over their head is more important and necessary than as you describe the discounted value of their pension benefits. Some in the pension world are too myopic and fixated solely on an individual’s retirement rather than their needs during the individual’s life.

However, confusing a one-off loan from a day lender with a cash offering from an ETV; isn’t the same. If a individual constantly requires a day lender at the end of every month, I would suggest looking at the person’s lifestyle.

Not all people with a defined benefit scheme are lucky enough to live on the same wage as an actuary or consultant. :-0

Peter Flanagan • I used the “day lender” as an example for argument as it shows how cash now is incredibly important to some of our members who otherwise would use such readily available cash. To extend the point many also have significant debt on credit cards – to simply think of what return can be achieved by investing the transfer value in today’s markets is over simplified actuarial thinking. If the money can be used to pay down existing expensive debt, or to pay for something necessary that would otherwise be financed by expensive debt then it is correct to consider the saving. This is why Independent Financial Advice and not generic financial education is the key and why for some an enhanced transfer value is a valuable option.

Paul Findlay • Now that I definately agree with.

John Reeve •(Premier Pensions) It seems to me that much of the bad publicity surrounds the use of “cash incentives” in these cases. In many cases I have been involved with there is no cash incentive and the “enhancement” is a pure addition to the TV. Peter gets it 100% right when he asks how this can be wrong!. If a TV is a statutory right then by dint of the english language an “enhanced TV” must be a better bet!

The other consideration is that many people with high benefits in a DB scheme (more than £20,000 p.a from all sources) is likely to want to transfer out at retirement anyway to get the advantage of the tax breaks now available.

Finally, in Henry’s excellent blog he refers to those “seriously ill” in fact you do not have to be seriously ill to benefit from enhanced annuities. Even relatively minor (and certainly common) ailments can entitle you to beter benefits.

In summary I think the arguement about ETVs is all wrong. We should be encouraging Trustees to offer better value for money for those looking to transfer. If that is called an enhancement then it should be encouraged. Along with help for members to make the right choice at retirement (DB as well as DC members) would add more to the benefit of members than the current view that “enhancements are wrong”.

John

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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11 Responses to That ETV debate in full

  1. Hilary Salt says:

    OK have to throw my thougths in.

    First a tangential but important point. For us collectively as a society, these transfers involve moving significant amounts of money (very significant according to KPMG) from a trustee vehicle to an individual vehicle. That means moving from a place where the assets are looked after by an engaged and varied set of people who have time to make decisions, have access to advice and operate on a collective basis which means they can be more diversified, take more risks and benefit from cheaper fees. And assets are moved to individual pots where perhaps the best they can hope for is the benign neglect of a lifestyle approach. So little engagement, next to no advice (see later), poor diversification, having to switch at the wrong time if your retirement requires it and high cost. Surely for us as a society, this is not an efficient way to provide pensions?

    Second – I am really concerned about the reliance on financial advice. Peter thinks members should get good financial advice and I agree – but has anyone ever seen an example of this? Full advice would mean advisers looking at all your assets and liabilitites (and yes they should probably advise you to take an enhancement if the alternative is wonga). But all that compliant advice seems to mean is comparing the db benefit with the projected dc benefit and telling the member whether to take the deal. And in cases where the advice is don’t transfer, the member often does anyway. And this isn’t because the member is stupid, it is because they recognise this cut down, employer sponsored advice process as a purely compliance based economic transaction. They know they will have no long term relationship with the adviser and so the process is utterly emptied out of social value to them. It may be getting away from the point but some of the better explanations of the riots and looting focussed on the dangers of a society where all relationships are solely based on ecomonic transactions (student/university parent/truant). This is another example.

    Rant over!

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  9. mark hardy says:

    Working class point of view.

    Im currently going through the evt (imi) and i feel i need to add a few comments regarding the offer i recieved and the financial advise i was offered.

    As a working class bloke i had made up my mind as soon as the offer letter dropped on my doorstep,it was a no-brainer for me,more money in one drop than i would ever have in my lifetime.
    Then came the financial advise.WOW.Figures,facts,low term rates,mid term rates,critical yields,stuff that went straight over my head.
    However the advisor spoke to me in person to explain it all.(basically i would be worse off pension wise come retirement age).

    Still i rejected his advise.Like most of the “working class” we live for today,making ends meet,week by week.

    The whole etv episode seems to be a long drawn out affair,hopefully the end is in sight,although trying to pin people down on a definate answer as to when it will be transfered is proving to be tricky(not as straight forward as it states in the offer imformation pack).

  10. spen says:

    Mark I have also opted to take the etv and I have been told to expect the cash to be in the bank Feb 24th fingers crossed it will be.

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