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/
I am surprised that you are misrepresenting my remarks Henry. I made it clear that I have not cashed in all my DB entitlements but in any case you don’t mention the reasons why I said transferring out can be the right decision. Those with other guaranteed income, those with no spouse, those in poor health, those who fear the scheme sponsor is too weak, those who want a pot of money that can help them pay for care in advanced old age and have no other savings to cover that, those who are still working and intend to keep doing so and want their pension to have the chance to increase tax free rather than being taxed possibly at high rates on the income from a DB scheme they may not need. All these are real examples of why the freedom and flexiibility as well as tax benefits of DC make it more attractive. But having said all this I insisted that this is not right for everyone and that it is vital to take independent financial advice (and pay for it). These decisions cannot be boiled down to a ‘right’ or ‘wrong’ but depend on a complex array of risks that need to be balanced and judged. A DB pension income of course has huge value to many but so too does a DC pension pot these days and the people in the audience who wanted to know more at least heard some of the pros and cons. Isn’t that what the meeting was for? Wishing you well and I was glad to see you looking in fine form. Ros
Ros
Thanks for coming on the blog, I would have had this conversation with you at the meeting, but it was more important that the audience heard from you than me!
I wasn’t referring to your decision to transfer- you have as much right to a transfer value and to take it as anyone else. What I’m moaning at you about, is your insinuation that pension promises made by occupational schemes are unlikely to be met in full. You actually said that in 10 years time you would be surprised if current indexation still applied.
This is dangerous talk which is picked up by the scammers and amplified.
I quite agree with you that every decision should be taken with a full understanding of all the risks (not just a go/no-go from a critical yield calculation). That’s why financial advice is valuable and is worth paying for. I became a pensioner last autumn despite a huge cash offer, for the reasons outlined by Stephanie at the meeting – I am no more right than you are wrong – but I worry that most people don’t have the chance to think things through in the round (I was concerned that last night was not balanced).
As regards pots to pay for long term care, most people will have a tax-free cash sum as part of their retirement settlement but many will have sources of finance (inheritances, sale of business or liquidation of private investment). I would place the liquidation of a pension at retirement well down the list.
I hear your call: ‘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.’
Since that comparison, both textual and quantitative, is a key component of the COB rules governing transfer analysis and recommendations, and is in turn the basis of FOS rulings on complaints about unsuitable transfers, presumably you feel either that the regulations are inadequate or that advisers are not generally following them. This makes it essentially a technical debate, not one of principle. There are shortcomings in the rules, not least in that the emphasis on critical yield assumes annuitisation whereas the comparative advantage that needs to be demonstrated assumes drawdown – ie a long period of exposure to risk premia, subject to stress tests over the whole of retirement. But these are not insurmountable and are requirements for good regulation of drawdown generally. It sounds like there was nobody there who could address the technical challenges of demonstrating comparative advantage, leaving the floor open to emotive expression of asserted principles. I’m sorry I missed it.
Perhaps the FT should publish data on the experience of those who took income drawdown from when it first became available and compare it with the position they would be in had they taken the annuity. Perhaps they should also plot how the ability to make financial decisions deteriorates as age increases.
There was one survivor of drawdown from. the nineties in the room – I understand the casualty rate has been frightening
On top from Henry… great piece. Lest we forget that ill judged views of transfers have lead the industry into some dark and damaging times before. I don’t suggest that the good folk at the FT session would ever advocate the type of activity that happened back in the eighties and nineties but it does illustrate the importance of having true levels of understanding informing the debate. Neither am I a Pension Freedoms doubter … for me it might be the tool to help manage my small collection of benefits sitting in schemes with different retirement ages as I move into my ultimate retirement position. Also for me the certainties of full certainty/annuitization might be an unaffordable dream. I am blessed to have the “misfortune” to come from stock with a history of decent longevity, live in a post code littered with very fine hospitals and have achieved a decent level of earnings in my lifetime… in other words on the wrong side of annuity/longevity underwriting assessments. So freedoms could be just the ticket I need – though perhaps for the benefits emerging from my DC accrual only.