The right to screw up your pension

Þingvellir

Image via Wikipedia

There’s a place in Iceland where the American and European tectonic plates grind together like two sets of molars. At Thingvellir you can smell the sulphur emitting from the fissures where the plates grind and you can peer into the unfathomable void that might sink to the lowest depth of the earth’s core.

There’s a debate going on in a Group I’m a member of – Pensions de-risking which while it may not divide continents, seems as delineated as the two cliffs that grind together at Thingvellir.

Here’s Rita Powell….

Good discussion on ETVs. Let’s remember though that many of the people on the receiving end of the offers are deferred members, so they can’t go the HR department. Many of them may not even have a job.

I’ve managed a few schemes that had many thousand deferred pensions – a high proportion of which were around £1,000 per annum – these people are not exactly looking forward to a luxurious retirement.

I also know of people who took ETVs that changed their lives for the better. Bought their first homes, paid off their debts, started their own business. One guy had his only holiday abroad ever – age 50 and had never been on aeroplane. It made him happy.

On a different tack, who wants to guarantee that the sponsors offering the ETVs are going to be around forever to stand behind their DB Schemes? Is the PPF really sustainable in the long term? How many Nortel‘s could it take?

I don’t think ETVs are good for everyone – but I don’t think they should be considered bad for everyone either. For me, the main thing is to take the “do as you would be done by” approach and make sensible offers that are capable of being reasonably accepted by some members. The size and shape of any offer is never going to be right for all, but they should all be well informed and independently advised. Good data, good planning, well trained admin staff and good clear communications are all key to making sure that members experience of the ETV offer is good – regardless of whether they accept it or not..

Here’s Alan Higham

The problem with ETVs and indeed with the other forms of Member Inducement Exercises is the weight placed on the financial advice given. Has anyone on this forum actually seen the transfer value analysis done by the main IFAs in this market and the advice that they give? Does anyone have a good reason to believe that the quality of the advice offered justifies the weight placed on it?

Here’s Margaret Snowden OBE

Thanks for the measured view from your experience Rita. Who are we to deny opportunity (and legal rights) to people? I think requiring advice to be given is right, it’s just a shame that an ETVis about the only time some members will ever have a chance to talk about their financial affairs at no cost to them, with an adviser who knows about pensions. I have faith that trustees take it all seriously and take steps to ensure members aren’t misled. It could be argued that debt is a bigger barrier to retirement wellbeing than any ETV decision and we might be a bit sniffy about it, but if debt could be paid off with a cash sum (which should be on top of the green light to transfer) surely this is no bad thing?

Here are a few observations of my own, I’ve never done transfer analyses but I’ve taken a fair few people out of DB plans when I was an IFA (without cash incentives).

  • The ETV is for most people the first time they get a proper idea of the value of their pension. The pound signs that flash up in client’s eyes when they realise they have more in their pensions than they can possibly imagine spending, blind them to rational decision making
  • It’s not just jam today, it’s the thought that there are pots of jam tomorrow that make people wreckless in taking ETVs
  • It is almost impossible to justify the paying of a pension through a life annuity over a scheme pension in terms of efficiency
  • Any form of hurdle rate used in a transfer analysis assumes a real return on the transfer net of charges and annuity rates anticipated but not guaranteed.
  • Companies can lend on an unsecured basis to employees in real financial hardship and recover the money through payroll.

In this I am with Alan;-  in  reckoning that the transfer analyses conducted at the point an ETV is offered are wasteful doing little good for the money they cost. Most people take decisions on gut feel not on rational argument;- and in any event, transfer analyses are based on assumptions that cannot be properly considered by the majority of transferees.

But there’s a side of me that sits next to PJ O’Rourke and Jeremy Clarkson as they drive their gas guzzlers down limitless highways telling the namby- pamby do-gooders to  boil their heads. Why shouldn’t people screw up their pensions

Now this isn’t Rita’s position and it isn’t Margaret’s. They are arguing that there have been “unexpected” consequences of the cash incentives from ETVs that have justified their payment and their argument rests on the delivery of the advice surrounding the decision and the suitability of the offer.

The insistent investor – the guy (or girl) who persists in a course of action against all reasonable advice may be heading for a car crash and we may argue that the cost of sorting that crash out will fall on us (the taxpayer).

As with rioters and bankers, I get angry when I see deliberately reckless behaviour being rewarded by mega bonuses and plasma screens. I get angry when I see pensions that have taken a working lifetime to accumulate, dissipated through the fools gold of a little cash today.

And I get more angry when I see houses being repossessed from those who bought the cheap mortgages packaged into CDO’s, when I see the young lives of those going through the courts for stealing inconsequential items, when I see people in their eighties and nineties who cannot afford to properly heat their houses.

 Alan’s point is practical – we are subtracting not adding to our nation’s retirement wealth when we provide hundered of TV analyses. These things cost hundreds of pounds each.

Furthermore , we are not taking risk off the table we are just redistributing risk.

Rita and Margaret are also pragmatic. For some, cash now and a different income stream later makes sense and who are we to deny them the option that the law has always given them.

My gut feeling is about timing and I refer to Margaret’s assertion

it’s just a shame that an ETV is about the only time some members will ever have a chance to talk about their financial affairs at no cost to them, with an adviser who knows about pensions

For me, the point when people need the chance to talk about their financial affairs with an adviser who knows about pensions is at retirement. If Trustees, companies and advisers could get together to deliver meaningful choice both about DC and DB benefits ar retirement, I think we’d be looking at a lot less people executing their right to screw up their pension.

I starte this blog looking at the superficial division I sa inthe positions adopted by me, Alan, Rita and Alan but I  think at a deeper level we’re agreed, we can’t stop people taking odd decisions with their money though we can do something to proetect themselves against silliness by appropriate choices offered at the right time with the right guidance.

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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