Five moral reasons I didn’t take my DB transfer.


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

REASON 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.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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19 Responses to Five moral reasons I didn’t take my DB transfer.

  1. George Kirrin says:

    A good example of gaming and shaming, Henry.

    I also fault trustees for allowing higher and higher CETV bases to be maintained.

    Instead of tipping off executive directors to fill their boots, the actuaries should be recommending insufficiency reports to more trustees. paragraphs 34-47.

  2. john mather says:

    Henry I do enjoy your blog but had a financial adviser given you advice when your DB scheme goes to the Protection fund you would have clear highndsigh case for compensation

    Putting the responsibility to the individual as you advocated earlier this week I am reminded of a similar moral argument attributed to Spike Milligan with apologies to FD Humans

    The boy stood on the burning deck: Whence all but he had fled; Twit

  3. henry tapper says:

    Thanks George – plenty of space on the blog for the text!

    This is what the Pension Regulator has to say about the trustee’s capacity to reduce transfer values because of the risk of insufficient funds to pay benefits… paragraphs 34-47.

    Reducing cash equivalents to allow for underfunding

    Insufficiency reports

    In certain circumstances, trustees are permitted to offer transfer values which are less than the ICE under the best estimate method. One of the permitted reductions is to allow for the funding situation of the scheme.

    However, trustees may only reduce ICEs for this reason after obtaining an assessment by the actuary of the funding of the scheme using the transfer value assumptions and known as an ‘insufficiency report’.

    Reductions to ICEs to take into account scheme funding must not exceed the maximum reduction identified in the insufficiency report.

    However, although trustees may reduce ICEs to allow for underfunding, they are not obliged to do so.

    The fact that the actuary has prepared an insufficiency report on the instruction of the trustees should not in itself be taken to be a recommendation that cash equivalents should be reduced. Matters trustees should take into account when deciding to reduce ICEs include:
    the degree of underfunding.

    The worse the funding position, the more necessary it may be to reduce ICEs to protect remaining members; their assessment of the strength of the employer’s covenant.

    The stronger the covenant, the less the trustees may feel it necessary to reduce transfers;
    the structure of any recovery plan in place.

    The sooner a funding deficiency is being addressed, the less necessary reductions may be;

    whether there are any contingent assets in place and if there are, their form. If contingent security is available to plug a funding gap if the employer were to become insolvent, reductions in transfer values may be unnecessary;

    whether the employer has undertaken to make a compensatory payment to the scheme each time a transfer is paid at an unreduced level.

    Where an employer’s covenant is judged to be strong, and any funding shortfall is being remedied over a reasonably short period, trustees should not normally reduce CETVs. On the other hand, where there are concerns about the employer’s covenant over the term of an agreed recovery plan, trustees should consider reductions in order to provide similar security to transferring as to remaining members. Trustees should ask the actuary to advise on one or both of the following as appropriate:

    the implications of not applying a reduction where one would be permitted;

    the implications of applying a lesser reduction than would be permitted.

    An insufficiency report (or a replacement insufficiency report following a scheme funding valuation) is not required unless the trustees wish to consider applying reductions to ICEs.

    When to commission an insufficiency report

    It will usually be convenient to commission an insufficiency report at the same time as, and with the same effective date as, a scheme funding valuation. Indeed, any reductions to initial cash equivalents being applied by virtue of an insufficiency report will have to cease as soon as a fresh funding valuation is received with a more recent date.

    If the trustees wish to continue reducing initial cash equivalents they may only do so after receiving a replacement insufficiency report with effective date no earlier than that of the new valuation (and the reductions must be based on that new insufficiency report).

    If trustees wish to consider reducing cash equivalents because of underfunding before they have received their first scheme funding valuation, they must either commission an insufficiency report or, where appropriate, base reduction on a GN11 report (see paragraph 40).

    A so-called GN11 report, which was prepared prior to 1 October 2008 under the legislation current at the time, may be treated as an insufficiency report at the discretion of the trustees. This is likely to be appropriate where either:

    the actuary advises that in their opinion any resulting maximum reductions to initial cash equivalents would not be materially greater than those which would result from an insufficiency report;

    the trustees wish to apply a lesser reduction than the maximum permissible but still need to be comfortable that it is appropriate and the actuary advises that the GN11 report provides that comfort.

    An insufficiency report may be commissioned by the trustees at any other time. Since funding deficiencies revealed at valuations must be addressed by recovery plans, the need for reductions in transfers because of poor funding should generally diminish with time. However, in some circumstances a new insufficiency report may be needed.

    These circumstances include: when the employer’s covenant appears to have weakened such that trustees wish to revisit a previous decision not to reduce transfers; when economic conditions suggest that a deficiency may have arisen or worsened since the last valuation; when for any other reason it appears that a deficiency may have arisen or worsened since the last valuation; and following a change of assumptions consequent upon a review (see paragraph 26).

    Since funding may improve between valuations, either as a result of a recovery plan or for other reasons, a reduction to a cash equivalent which is appropriate just after the last valuation may no longer be appropriate as time passes. The trustees should consider how their approach might be reviewed in such circumstances.

  4. henry tapper says:


    We have discussed this before and you know I agree with you that a financial adviser should take into account the strength of the employer convenant and the solvency of the scheme, if there’s no reduction in the CETV, that should be a green light that the scheme is likely to remain solvent, if there is a reduction , then you will find your critical yield will be higher because the CETV is reduced. Either way, you are getting an offer on the value of the promise (like a bond).

    I get pissed when I hear advisers using events like BHS to frighten people into transferring. These events are uncommon and the haircut of the PPF is not calamitous (it is typically a 27% haircut). The vast majority of DB schemes are solvent (see the FAB Index) so long as you measure them on a best estimates basis. We are doing our best to committ collective pension suacide with our dash for bonds, but people are beginning to see the stupidity of that too!

    Come to the pension playpen lunch on Monday 9th – we will be discussing these issues , de-risking and LDI.

  5. Dennis Leech says:

    Well done, Henry. An excellent blog response to the FT article. When I read it last night I was appalled not only by the shocking behaviour of the people taking the CETVs without thinking of the basic morality of doing so. What they are doing is obviously selfish and harms others.

    I was equally dismayed at yet another instance of the poor journalism of the FT when it comes to pensions. Time and again their pensions reporting is superficial and lacking in evidence. Can something not be done about it?

  6. stuarttrow says:

    Hello Henry

    Thank you for your thoughtful and insightful comments over the past year. I especially like the way you tie in social and moral issues, as well as including an economic perspective, which more closely relates to my day job beyond pensions.

    Finally though I’m kicking myself for flagging, but not acting upon the email about the pension play pen lunch, which I would have loved to have come along to. I’ll make it a resolution for 2017, if I may, to make sure I attend next time.


    Stuart Trow


  7. Most of your arguments describe your utility, Henry, not morality. Here’s how you present to an adviser like me: as valuing a mutual organisation (a pension scheme) over mistrusted individual agencies; you value (increasingly with age) the simplicity and low cost of the DB arrangement; you (probably) would take the certain DB (or equivalent annuity if your only pension was a personal pension) over an uncertain distribution of lifetime outcomes from drawdown however skewed we suggested it was in favour of upside – including valuing a fraction (50%?) of your income for your wife if she survives you compared with an unreduced (but uncertain) draw from a personal pension.

    Morality really only applies to the question of whether CETVs are set without proper regard (as regulation requires) to the interests of the remaining members. I’m surprised by your comments here and I wonder in what way are the regulations deficient so they permit gaming by transferring members: is it inherent in the design of the rules or just a weakness in implementation? Would you not agree that if regulation could ensure no biased outcomes there is no moral issue?

    As transfer advisers we have to take the fairness of the CETV on trust, relying on the pension regulations. (Note incidentally that the FCA rules implicitly make the same assumption, so the onus on the adviser is limited to comparisons of benefits given the offered CETV – so suitability in terms of personal utility, not fairness.) Whilst there are clearly many cases where deferred pensions are fully hedged and so there is no question what discount rates to apply, and others where all liabilities are matched without equity holdings, we do assume there could be cases where there is an element of equity backing but the CETV nonetheless relies (at trustees’ discretion) on gilt yields. That could bias in favour of members transferring. We have no idea whether that actually arises very often whereas we certainly see cases where the asset mix of the scheme includes equities and the CETVs are not nearly as generous as if using gilt yields – much as used to apply to all cases.

    It follows from this that as a firm Fowler Drew does not take the view that DB schemes are generally harmed or otherwise by transfers. The scheme is indifferent. The member may not be but only because of personal utility.

  8. henry tapper says:

    I can see your argument Stuart, but you are arguing about another issue. I am not having a go at advisers but at corporate greed, a paradigm of thinking among the congnoscenti which is self-serving and morally corrupt, Ultimately this behaviour destroys confidence not just in pensions but in corporate governance. It destroys trust itself.

    Transfer values are calculated on a best estimate basis, they use a discount rate based on the best estimates of the scheme’s likely assets. Currently schemes are heavily invested in bonds and yields are artificially depressed by QE and the low inflation/interest rate created by QE.

    The clever people taking TVs are generally aware that CETVs are artificially high and that now is the time to max out (well 3 months ago at least). What they are doing is not illegal, it is immoral. It is not illegal to asset strip but it is immoral, it is not illegal to get an enormous executive compensation package nodded through by the Remco, but it is immoral.

    When an organ like the FT reports a former pension minister, one of its senior journalists and a club of 10 execs maxing out their CETV, people ask questions about behaviour.

    My blog is not about transfer advice, IFAs are merely the gatekeepers; my blog is really about the behaviour of the people who “know” and use their “knowledge” to feather their nests at the expense of the little chickens.

  9. John Moret says:

    We still live in a free world Henry – well most of the time. I think your arguments are part of the much bigger “collectivism” or “individualism” debate (Nanny state v the individual) -a subject you’ve written on many times and I think I know which end of the pendulum swing you sit on -and I’m probably at the other end. That said I have a healthy DB pension in payment which is comforting – on top of which sits my SIPP and other savings -so not dissimilar to your position. I rejected a “PIE” offer a few year ago – not on moral grounds but because I didn’t think the terms were fair for me – but I’ve an open mind to future offers. I have little loyalty to other scheme members or my ex-employer – I “retired” from the scheme nearly 15 years ago. I think the perspectives of active members, deferred members and pensioners are very different and your comments are therefore too sweeping. Also they may be unfair to the individuals that you criticise without knowing all the facts.
    Nevertheless your blog is a useful -and provocative – summary of the major issues for anyone with a DB pension. Happy New Year!

    • henry tapper says:

      Thanks John! Well i wouldn’t expect universal praise from Mr Sipp and you’ve done more than anyone to make the SIPP a sensible option but to accumulate savings and to spend them. Happy new year to you!

    • Mark Scantlebury says:

      Hi John
      Reading your post it struck me how imbalanced the phrases’the nanny state/the individual’ are. The first carries so much polarised meaning/feeling , the second so neutral/rational.

      • henry tapper says:

        I never had a nanny, but I think it would have been nice to have been Christopher Robin and to have “gone down to the sea with nanny”. Do you think the nanny state should offer free off-peak returns to Margate/Rhyl/Blackpool ? I do.

  10. Thanks for addressing my reply, Henry. You set out clearly and simply what people are doing: ‘Transfer values are calculated on a best estimate basis, they use a discount rate based on the best estimates of the scheme’s likely assets. Currently schemes are heavily invested in bonds and yields are artificially depressed by QE and the low inflation/interest rate created by QE. The clever people taking TVs are generally aware that CETVs are artificially high and that now is the time to max out (well 3 months ago at least).’

    Let’s park the individual value judgements and focus on where the economic value is coming from.That’s what matters to us as advisers: we should know it and be able to explain it. We assume (because it looks to be broadly what’s happening given the relationship between capitalisation rates and asset mix) that it’s just from market conditions: the ‘unusual’ excess returns available from risky versus hedging assets assuming, as a matter of opinion, that equities have not been pumped up as much as gilts. You seem to be saying as much above: a conjunction of pension regulatory policy and monetary policy. In that case it is not necessarily exploitable only by harming others in the same pool. Hence my original question: ‘I’m surprised by your comments here and I wonder in what way are the regulations deficient so they permit gaming by transferring members: is it inherent in the design of the rules or just a weakness in implementation?’

    Con Keating has explained in some technical detail the possible source of weakness in the regulations as between two different sets of assumptions, more and less robust, in different situations. That describes a theoretical possibility of gaming, with a transfer of value from other members equivalent (I think) to the additional funding cost that would be recognised if the scheme itself had derisked in the way it is effectively derisking the departing member. But it sounded possible rather than inevitable, more about implementation. So I put a similar question to him: are actuaries typically using their discretion poorly, where assets held against the liability are not hedged but they are using a discount rate drawn from the natural hedging assets as if they were? Likely scale and impact, in other words.

    I also made (and will repeat) a general plea: does anyone amongst your readers know the answer?

    • George Kirrin says:

      Are actuaries typically using their discretion poorly, where assets held against the liability are not hedged but they are using a discount rate drawn from the natural hedging assets as if they were? Yes. Most actuaries and most schemes use gilts-based discount rates irrespective of the assets held.

      I also think this tendency may be exacerbated by the “dual discount rate” methodology of using a higher discount rate (gilts plus) for pre-retirement benefits and a much lower discount rate (gilt redemption yields or less) for post-retirement benefits. This methodology seems to increase CETVs for older members relative to younger members.

      CETV terms seem to be set in practice by the scheme actuary having regard to market rates of return, point in time “best estimates” rather than longer term, perhaps partially smoothed, assumptions set by trustees, after taking advice, for other annual or triennial funding reviews.

    • henry tapper says:

      I don’t think actuaries can be blamed unless they are using a discount rate that doesn’t reflect the best estimate returns of the assets in the scheme. As far as I am aware this is not happening.

      Con’s notional grant at outset is perhaps a steady state estimate of what a typical pension scheme might expect over a very long time. No one , when these schemes were being set up, envisaged them being invested so heavily in gilts. Smart people see the window of opportunity and jump through it – as you know.

      I am not an adviser, don’t write for advisers and am not making value judgements about the advice you give your clients. I think that senior people have moral responsibilities towards pensions and should show some solidarity. This is a personal opinion and – as the rubric at the top says – the opinion is mine and mine only!

      You are quite welcome to park your views in the comments section but please don’t ask me to park mine!

      I don’t get paid to write this stuff and

  11. Mark Scantlebury says:

    I like your spirit Henry.
    A thought about happiness. Some people get very unhappy when the feel they’ve not got the best deal – so they may be driven to take the TV. Others would rather stick with what they started out with, feeling good that it’s the fairest position. As Rory Sutherland would agree – people follow their emotions. Justify choices later.

    What I do think is very wrong is execs, with the knowledge of insiders, gaming the system, taking the view that ‘I’m all right Jack’ – interestingly (in the light of your ref to rats/sinking ship) a phrase coined by David Bone a highly decorated sea captain who risked his life breaking the German blockade during the 2nd WW.

  12. henry tapper says:

    Thanks for those kind words Mark; of course a blogger should never be hurt by being told he is talking utter nonsense and of course I am not hurt by the many people who have said this blog is utter nonsense!

    Nonetheless, it is nice to know that you are in support of my position regarding the rats.
    For the avoidance of doubt, I do not consider Bsaroness Ros Altmann, Mr Martin Woolfe or the “club of 10 (rats)” to be rats nor do I suspect their pensions are sinking ships, these terms are used figuratively.

    Further enquiries should be addressed to

    Guy Edwards Senior Publisher Law, Humanities, and Social Sciences Journals | Oxford University Press Great Clarendon Street | Oxford | OX2 6DP | UK

  13. Harry Lime says:

    You wrote: “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 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.”

    I suspect a stitch-up. Civil servants and MPs all have DB pensions, and the rest of us for the most part have DC pensions. By setting the LTA multiplier for DB so that civil servants and MPs are largely unaffected but the government garners cash from the remaining “sucker” DC savers, those that make the rules here are simply looking after themselves and their own first and foremost, while happily applying the screws to everyone else. A pox on the lot of them.

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