Jo Cumbo (my journalist of the year) has finished 2016 with a fascinating article on what (her sub editor?) describes as “a stampede to cash in gold-plated final salary schemes“.
I felt angry – a little bit “dirt” when I’d finished reading it. Ros Altmann, someone who I admire, has taken her two CETVs and told Jo
“The sums were attractive to me and it was hard to imagine the offers going any higher,”
Good economic sense or shameless gaming at the expense of others?
The chances are her cash-equivalent transfer value (CETV) has rocketed because her DB trustees took John Ralfe’s advice and invested its assets in bonds, that’ll make the best estimate discount rate trend to zero. Liabilities up, and scheme assets missing the equity bounce – happy new year for the CETV crew, not much fun for the rest of the gang….
There was also an example of a transfer club of 10 senior executives who’d collectively ripped £30m out of their company’s final salary scheme.
I like the honesty of the FT’s Martin Woolfe, who claims he’d have to live to 100 or see the world economy collapse not to do better from a CETV,
“At current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage of that fact. I have done so”
If you’re going to game, be honest about it! Which is more than can be said for this from a senior actuary (who should know better)
The FTSE 100 company executives “had been speaking to each other and were aware of the high transfer offers”, said Jon Hatchett, partner with Hymans Robertson. “These executives cashing in would have reduced the scheme deficit by millions.”
I am not an actuary but even I know that paying out transfer values which have become “significantly overvalued” is not reducing the scheme deficit, it is reducing the assets within the scheme to make future payments to others by an amount inflated by the freak-enomics of Quantitative Easing.
Taking the CETV is pure selfishness, it is not done for the benefit of the scheme’s long-term solvency. Even Ros hasn’t got the chutzpah to claim that!
REASON 1 – I am a part of a pension scheme!
The scheme I joined in 1995 and became a pensioner in 2016 will be the scheme I am in till I die. If I can prevail on my partner to marry me, she’ll get my pension till she dies! My covenant to the scheme is a social covenant – a moral covenant. I will not game transfer values.
As for the “rats leaving the sinking ship” argument, back in 2009 a gang of execs in the Ilford pension scheme tried to make off with some ‘uncut’ CETV’s. The Pension Regulator caught them in the act. Read about it here
You can no longer bag the life raft just because you’re first to know the ship has sprung a leak! There is supposed to be social solidarity within a mutual endeavour. The leaders of a company are supposed to show moral leadership – that’s why they get paid so much!
REASON 2 – I have no need of my transfer value
My experience of sitting on a big pile of cash is that it doesn’t make you happy. The phrase “money burning a hole in my pocket”, does not sit in the lexicon of a rational economist, but it’s behaviourally spot on! I have some money in DC which results from a lifetime of DC saving, this week the value went down despite the markets going up, I don’t get happy from a big pile of money – I get anxious. People who sell houses don’t sit on their winnings, they reinvest because they want rid of money burning a hole in their pocket
REASON 3 – I have absolutely no confidence in “high-maintenance” wealth management
As I have written before, wealth managers scare me shitless and I have no time for the high fees and mumbo jumbo of the asset allocators who sell me hocus-pocus theory dressed up in “discretionary fund management” agreements. They can keep their model portfolios, wrap platforms and high fallutin’ tax-advice. My pension pays me a fixed amount that is inflation protected, it protects my family and it is “no-maintenance”. Short of declaring it on my tax-form, everything is done for me – thanks very much Zurich Pensions
REASIN 4 – I want an incentive to live!
I don’t want to die! I want to live a long and happy and productive retirement. A pension which goes up with inflation is an incentive to stay on the planet, a diminishing lump sum is a reason to die. My family will see my lump sum as part of their inheritance but my pension as my means of independence. I bet there’ll be some nervous parents in drawdown in the weeks before their 75th birthday.
I take my lead from Saint Bob who kicked off his fame with the Boomtown Rats – Lookin after #1, containing this powerful advice to take your pension!
When I get old, old enough to die, I’ll never need anybody’s help in any way!
The social consequences of drawdown have never been much discussed. They scare me.
REASON 5 – I don’t want a massive tax-bill!
Ok – I know this makes me sound a gamester but of the five reasons this is the one that matters least. Take those ten execs with average CETVs of £3m. Lets say they were getting £40 for every pound of pension given up. That means they were giving up pensions of £75,000 a year. At the valuation factor of 20 -that’s within the 2014 life time allowance of £1.5m. By busting the DB and going for DC, they will see half of their “cash” subject to penal taxation. If they had kept their 2014 lifetime limit, all of their pension would have been taxed within normal income tax bands.
Why does tax work like this? I suspect there is a social reason, I suspect that there is a moral reason. I suspect that it is best for society as a whole that people take pensions and not cash. I would have to ask George Osborne or Philip Hammond if that is the case, but if I did-I hope that that is the reason why the LTA treatment of defined benefits is currently twice as favourable as the LTA treatment of a CETV,
Economics v morality
This last tax-point is marginal, I am sure that Ros and the execs and their advisers had done their sums and simply slapped on an extra 0.5% on the critical yield. I’m sure that their economist brains had told them that in the long-term, they could expect to bear the critical yield so handsomely that “this time next year- we’ll all be billionaires”.
In the new year, I hope to be spending time with a nice man I met in the autumn- Rory Sutherland. I have been to hear him talk about behavioural economics, he speaks the language of happiness and he looks like Father Christmas. He is the deputy chairman of Ogilvy and Mather (so he should be a stress bunny).
When I’ve met him and heard him speak, Rory is happy. He rails against economists who he sees as saddoes, they understand the price of everything and the value of nothing!
The economist’s accusation of “being happy” can be made of Lesley Griffiths, my minister (who I hope will be drawing his methodist pension!) and the same can be said for my Mum and Dad who are enjoying their 31st years as pensioners of the NHS pension scheme.
In its descriptive sense, “morality” refers to personal or cultural values, codes of conduct or social mores. It does not imply an absolute claim on right or wrong, but refers to that which is considered right or wrong.
In my world , taking a transfer value is an immoral act, for the five reasons laid out above. Those economists who take CETVs are behaving – according to my value system -immorally.