“Sexy cash” legitimised?
A few years ago , Sir Steve Webb, then our pension minister, stood in front of the PLSA and berated Boots and its pension scheme for tempting members out of the pension scheme with cash incentives. He called the incentives “bribes” and labelled them “sexy cash”. I wrote about this at the time; Perverse incentives; Sexycash or prudent pension?
What was then a “perverse incentive”, is now fair game and Webb has recently been touting transfers, transfer advice and by extension personal pensions , as a legitimate alternative to a scheme pension. He is not alone; Baroness Ros Altmann has boasted that she has cashed out her two final salary pensions; noted journalist Martin Woolfe is openly advising FT readers to do the same and Jo Cumbo reports a club of executives recently taking £30m out of a large DB plan through 10 individual transfers, with the blessing of Hymans’ John Hatchett, who suggests that they are “de-risking” the scheme.
If we follow the logic, then the encouragement should have appeared in August when discount rates were at their lowest and transfer values were 10-13% higher than they are today.
But the logic is flawed. In an excellent comment to a recent article Five moral reasons I didn’t take my DB transfer, Stuart Fowler defends the advisory process.
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.
Where there’s no haircut, the discount rate applied to get the transfer value should be aligned to the critical yield, the issues surrounding reduced CETVs are discussed in the comments section of the same blog. All the adviser needs to concern himself with is the critical yield, he or she does not have to concern him or herself about the impact of the transfer on the scheme or with the Pensions Regulator.
I agree with Stuart, though I have never tilted at his windmill. I have a friend who is dying and spending his CETV on making his remaining days delightful. There are plenty of exceptions that prove a rule.
But I spell out my moral rule about the proprietary of taking transfers in Five moral reasons I didn’t take my DB transfer. My rule is that a pension should stay a pension other than in exceptional circumstances. The arguments to do with this are based on privilege.
- Those privileged to have large CETVs – let’s say over £500,000 – are generally the beneficiaries of high accrual schemes and/or high levels of pensionable pay. Written into these awards are the usual responsibilities of office, to my mind they include responsible behaviour towards the remaining members of their scheme. The privilege here extends to having the means to pay for advice through wealth management (unless the advisory payment is unconditional on the use of the adviser’s wealth management service).
- Even those with smaller CETVs (such as those reported to have been taken by Ros Altmann) have privileged understanding. Ros was able to use her familiarity with economic cycles to cherry pick the timing of taking her CETV to her maximum advantage (and by implication – to the long-term detriment of the scheme). This is a simple market timing issue – not insider trading – but purposefully a “game” against long-term scheme funding. Such people are confident enough to be insistent and can typically look after themselves with regards advice. By definition they regard themselves as special cases and do not recognise they have any moral obligations to others.
- Then there are a few with privileged information of the weakness of the employer covenant who take full CETVs in advance of a haircut. This is the behaviour outlawed by the Ilford Ruling. As far as I know, the Pensions Regulator has yet to sanction anyone for being a “rat leaving a sinking ship” and this may be because trustees can take steps to stop this sort of thing.
- Finally there is the unfortunate constituency of those “privileged” to have perceived guarantees on the scheme they are transferring to. By this I mean those convinced that they know a way to make a return (net of charges) in excess of the critical yield. For the most part these perceptions are bogus, most are created by scammers but some result from a misunderstanding of the limits of wealth managers.
To simplify, let me characterise the four classes as
I have plenty of friends who are proud to see themselves in group two, they know I don’t approve of their behaviour on ethical grounds but let them be, they are not a large group.
The fat-cats are collectively a menace and it’s still not too late to shut the stable door on them. If India can remove high denomination bank-notes, the Pensions Regulator can stop high denomination transfers- they should seriously think of doing so (freedoms or no freedoms). The privileges these people have within the scheme suggest these people should be supporting other pensioners (ideally lending their skills as trustees). These are people who other members should be looking up to, they should be the last people on the lifeboat not the first.
The insider traders are simply desperate fat-cats, lets hope there are few such-and that those who are missed by trustees are brought to book by tPR.
As for the unfortunates who take transfers and find their promised pensions let them down, I know no remedy but for the Pensions Regulator to strengthen the trustees hand. A few years back, the Regulator was suggesting that trustees were responsible for redress where a scam occurred. This blog argued this was outrageous as Trustees were not given the powers to block transfers , when they smelt a rat. Angie Brookes and her crusaders are right in campaigning for greater action from the Pensions Regulator. There should be a process for whistle-blowing, where Trustees can refer individual cases to the Pensions Regulator or the Pensions Ombudsman or to a fast-track of Action Fraud so that suspicious transfers can be give immediate attention.
Flying in the face of Freedom?
We have something in this country called “corporate governance”, it does not allow business leaders freedom to do what they want. The pension freedoms should be subject to corporate governance. We have a secondary code of behaviour which governs experts, it is called a “fiduciary obligation”.
Lawyers, actuaries and other pension professionals are bound by their professional codes, other experts are bound by their contracts of employment, duties to their regulators and even by their religious bodies. In short, society is made of a matrix of moral codes which are more complex and deeper than the anarchy of “pension freedoms”.
Even the arch libertarians agree with Bob Dylan that “to live outside the law you must be honest!”
To live outside the law…
Transfer values have probably peaked and already critical yields are higher than last autumn. But they are still historically high, reflecting the peculiar conditions we are still facing almost a decade on from the financial crisis.
Those who caused the financial crisis were a combination of fat cats, experts and crooks, (categories 1,2 and 3 above). There were also a lot of scammers in there who may now have moved from selling PPI, CDO s etc. to marketing pension scams.
So long as the financial industry (and its press) continues to consider raiding the pensions larder for personal gain, acceptable, confidence in pensions (and those who manage and own them) will remain low. There are acceptable standards of behaviour and there are unacceptable standards. Some would argue Philip Green did nothing wrong, those people may – at the same time – be feathering their own pension nests with the feathers of the little chickens.