Last night the FT put on a seminar on final salary pension or – more exactly – how to slip the noose of a pension for life for pension freedoms.
FT journos have been willy-waggling their new found pensions wealth . Martin Woolf has transferred and so has Baroness Altmann, Clear Barrett and Merry Somerset Webb bemoan their lack of defined benefits to liberate.
Yesterday’s room was full of baby-boomers split between those with bulging DC pots, those worrying whether to press the button and a hard-core of DB faithful.
The debate was not particularly balanced. Ros Altmann claimed “Brexit had sent CETVs sky-rocketing”. This is a partial truth, CETVs are calculated using scheme specific discount rates; where the scheme has moved to invest in gilts, the discount rate was vulnerable to fluctuations in gilt rates and there was a Brexit bonanza, for schemes invested in a mix of growth and matching assets, there has not been a CETV bonanza.
This subtlety wasn’t picked up in the ensuing debate. Indeed Chris Darbyshire of Seven Investment Management told the audience their transfer values were calculated using the risk-free rate, which is just wrong. Darbyshire went on to describe his wealth management model, which included an 8% return on assets – this didn’t encourage one delegate.
It got worse
Worse was to follow with Altmann claiming that in ten years time we could not be relying on the pension increases we (DB pensioners) are currently enjoying. Luckily for me I’d spotted top Mercer actuary Mike (Monckman) Harrison in the room and held my fire!
Mike didn’t – making it quite clear that there is no plan within Government to reduce indexation on existing benefits, other than extreme distress (where schemes join the PPF). .
It is odd (and disturbing) that our former Pension Minister is now arguing that pension freedoms are a way to avoid non-payment of DB promises. The argument used by Altmann echoes the arguments used by the scammers. This kind of talk is sensationalist, scare-mongering and irresponsible.
A very unbalanced debate
The debate, such as it was, pitted Ros Altmann and Chris Darbyshire against Stephanie Hawthorne, (about to become ex-editor of Pensions World). Stephanie did a pretty good job of arguing to stick with your DB pension but she was given too little support from Chair Claer Barrett.
Stephanie was presented as a relic (which is what Pensions World – which closes next week- is about to be!). Could the FT have chosen a more poignant symbol of the passing of the baton?
There are plenty of great advocates for DB who would have stood beside Stephanie, I wished Mike Harrison, or Andy Young, or Hilary Salt or Con Keating had a place at the table. But the bases had been loaded.
And since there was no-one who actually knew the rules behind transfer values, we spent much of the time talking about the wonders of wealth management, multi-asset funds and the happy lot of the fund manager managing his own wealth.
Where concern was shown, it was for the ad-valorem fees charged by advisers. Again there was no proper debate about why adviser charges are linked to the size of transfers though it’s pretty obvious that the biggest overhead an adviser has is his Professional Indemnity Premium (which is ad valorem the CETV). Chris Darbyshire said he begrudged paying an adviser but by that time he’d already shown he didn’t understand what his CETV was valued at (certainly not the risk-free rate).
The reason that insurers charge such a premium to insure transfer advice is that they trust no-one (not Government, advisers or those seeking the transfers). On the evidence of what I saw last night, they are right.
The speculative and the specious
There were plenty of advisers in the room and I wondered how many of them really knew the value of the DB benefit.
John Mathers, who sat beside me, demonstrated a greater understanding of tax strategy than the panel. He showed me a list of 11 tax treatments of the pension crystallisation event since the introduction of the annual and lifetime allowance. Ros Altmann’s arguments that pension freedoms were a means to pass wealth across generations sounded speculative if not specious.
Ros Altmann talked down the value of an indexed income stream as inappropriate for a generation facing long-term care obligations. These obligations are nothing new but veteran journalist John Lee was dragged into the debate as someone who’s retirement strategy was quoted as building up a multi-million war-chest to keep him and his wife in a top care home.
As the debate drifted into the “How to Spend it” territory of FT’s Weekend, I wondered whether I was inhabiting a parallel universe. Not only have I failed to pick up on the Brexit Bonanza, I actually started drawing my pension in November 2016, at exactly the point when the “guilt-free rate” was highest (pun intended). Not only did I not cash out my pension, I did not take my tax free cash. I want a certain income for the rest of my life.
There is nothing speculative or specious about my pension , I know what I’m getting, when I’m getting and I know my payments will last as long as me.
70% of those asked by Aon in their recent retirement survey said they wanted a certain income for the rest of their life.
The one thing you know what you are getting from a defined benefit scheme is a defined benefit, nothing – not investment returns, not sequential risk, not tax and certainly not the arguments around LTC,tax and longevity gave me any encouragement that those exercising freedoms had a plan,
Dr Beeching and his witless accomplices
George Osborne has done for Pensions what Beeching did for railways.
He has ripped up the tracks and trusted that the future will bring an adequate replacement. Ros Altman finished the job by putting a stop to the collective decumulation regulations resulting from her predecessor’s work on Defined Ambition.
She told us the market would offer us a replacement for DB and DA,
The replacement on offer (according to my FT goody-bag) was the chance to discover my future today with Seven investment management.
The Wealth Management industry does not have the answers for the vast majority of people who cannot afford its fees, or the advisory fees that come with it. It has no answer to longevity, no insurance against long-term care and is about as much use as rural bus services.
What ordinary people need is a proper debate on pension transfers based in fact not prejudice, which looks at the value of the benefits lost and the cost of replacing them. This was not that debate.
Ros Altmann has since published her thoughts on transferring out of DD schemes – you can read them here; http://pensionsandsavings.com/pensions/transferring-out-of-guaranteed-employer-pensions-can-be-a-good-idea/