In late March, Willis Towers Watson (WTW) published a survey of the choices made by 170,000 members of occupational defined benefit schemes.
This is the question the survey sets out to answer
“What choices have pension members made since the dawn of pension flexibility?”
I urge you to read it. It is the best research I have yet read into what is really happening to DB member benefits .
But it is flawed in its conclusion and the flaw can be found in the language of the question . “Dawn” is a loaded word -it implies positive change , which is all rosy stuff. But all that dawns isn’t rosy and the report doesn’t provide the balance that the debate over member choices need.
Need or want? Pension or cash?
In this article I argue that trustees are being corralled into providing what people think they want – not what they need.
Flexibility is what most members want, that means cash not pensions. WTW report recent cash equivalent transfers (CETVs) up ten times on pre 2014 budget levels.
Whereas in the past, consultants had to organise Enhanced Transfer Value (ETV) “exercises” to inflate transfer values beyond their best estimate valuation, they are now having to martial IFAs to convert enquiries into actual transfers.
The IFA is now part of the de-risking armoury as he or she is now converting over half of enquiries – up from a third only a year ago.
WTW conclude that with transfer values at all time highs, the demand for financial advice from members wanting out is being met by financial advisers eager to manage the money. A more sombre note is sounded for the future. Where Transfers fall in value, the appetite for members to pay for financial advice may also fall.
Without advice , there can be no transfers (other than for “trivial” pension rights). This leads to bizarre speculation.
Bizarre?
Schemes – as opposed to scheme sponsors (employers) are in the business of paying pensions. They may outsource the payment to an insurer but the member outcome is the same – a lifetime income.
It is bizarre that schemes are now expected to pay for advisers to winkle transfers that provide people with flexibilities – but not necessarily pensions. I say “necessarily” because it seems many of the people taking CETVs who had been surveyed told WTW they had or would be buying a private annuity with the money.
RTO =Retirement Transfer Option
This suggests that people are exercising choice not just to get cash but to get the shape of income they want. Certainly you can get a higher initial income from a level annuity than from a scheme pension but an escalating scheme pension soon catches up. If people think they are getting value from an individual level annuity as opposed to a scheme pension then they have an odd understanding. Bizarre!
Even more bizarre is the supposition that Trustees will want to sponsor advice so that people make choices like that. If they have any form of conviction in their acting in their member’s best interests, they should be asking whether the outcomes of the transfers are likely to match the scheme pensions given up.
Do Trustees care?
At the beginning of the report, WTW produce a wheel of options available to schemes to offload liabilities and “de-risk”.
But it leaves out the most obvious de-risking tool at the trustee’s disposal; cash commutation factors.
While most schemes offer CETVs in excess of 30 times (sometimes 40 times) the pension given up, you receive tax-free cash (if you take that option) “commuted” at as low as ten pounds cash to one pound pension given up.
People take their tax-free cash from their defined benefit schemes on terms up to 75% worse than offered on CETVs. Trustees sanction this anomaly because people will take tax-free cash on almost any terms. Scheme solvency is being propped up by the outrageous commutation factors being offered and there is a conspiracy of silence about it.
That is one reason why tax-free cash commutation figures don’t appear on the de-risking wheel.
Trustees do care, they care about the solvency of their schemes. But they don’t care that commutation factors may be ripping off members taking tax-free cash and they can justify this by saying they want people to take pensions not cash.
What they cannot do is justify “de-risking” by getting people to take freedom over pension as that is entirely not what a trustee is about. If tax-free cash is an incitement to be feckless with your pension rights, so are pension freedoms.
This is bizarre, WTW are encouraging trustees to behave in precisely the way they have been preaching against for the past forty years. What is more, they are operating a dual system of exchanges where pension to CETV is valued at four times pension to tax-free cash. There is simply no actuarial or moral basis for this.
Trustees should care about this. They are being advised to become opportunistic dismantlers of the schemes they run. They are being put in an awkward position with their members and sooner or later they will find themselves either being challenged for not giving fair value on commutation or over-egging CETVs – or both.
Not “de-risking”- “risk transfer”.
Trustees must act with a duty of care and should be very careful about the way they discharge their pension obligations. Some of the money that flows from DB schemes simply lines the pockets of scammers, Much of the money is being wasted on inefficient and inappropriate drawdown products, some is being taken as cash with high tax-bills to come. Some is even being used to purchase annuities that cannot be as effective as scheme pensions. All the money flowing out of occupational pensions is transferring risk from schemes to members. Much of the value is transferring from members to agents.
While many members will happily accept the risks – and be able to manage them – many won’t. The mass migration of members -evidenced by the ten-fold increase in transfers and the eighteen fold increase in transfer monies, suggests that the flood gates have been set to open.
I fear for this risk- which is now in the hands of people who the OFT have described as quite disengaged.
WTW’s report is excellent, I urge you to read it, it is the most important statement made to date on what is going on. But it is misguided in concluding that what it calls “de-risking” is a win-win-win.
If it looks too good to be true – it probably is too good to be true. WTW would do well to think back to the days when they said the same kind of things about Equitable Life.
The Willis Towers Watson survey is here https://www.willistowerswatson.com/en/insights/2017/03/DB-member-choice-survey-2017?platform=hootsuite
Very good points Henry. I don’t have pension transfer permissions and rarely have had clients I have referred to the transfer specialist I trust reccomend a transfer.
I am not going to take the time to read the WTW report, but I would like to see a response from them to your article and I would read that.
Henry, what an excellent, thorough article. Phil, as a pension transfer specialist it is clear to me that those who seek advice as to the pros and cons of moving from one type of guaranteed pension to a different kind of pension – one which relies on a lump sum generating sufficient returns to produce equal or superior or beneficial alternative outcomes – need to have things explained very clearly. When assessing the viability and advisability of a transfer I take into account the genuine needs and preferences of the potential transferee, the shape of benefits they require, the tax situation, their health, their ability to withstand adverse investment outcomes, their personal situation (eg single/married, ill health, life expectancy), the amount of other sources of guaranteed income available, the availability of alternative assets to generate an income, the likely income needs they will have broken down into essential, normal and desirable expenditure, the need for capital to fund one off expenditure, the benefits or otherwise of being able to take benefits flexibly as and when they need them, their attitude and psychological need for guarantees (or not), their previous experience of making and cashing in investments, their existing investments and pensions, the requirement (and likelihood) to take advantage of passing down unused benefits to their family, the value of money of the transfer and several other things. This takes many hours of analysis, and also requires the commitment of the potential transferee to engage in the process and to take ownership to understand the pros and cons of transfer. At outset I make it very clear that if my advice is not to transfer then I will NOT sign a form to enable them to proceed on an insistent basis, and that they will need to pay for my advice out of their own funds. I would not be interested in knowing why a transfer value was enhanced or not, unless it was a sign that the existing scheme was in serious financial difficulty and trying to get future pension liabilities off the balance sheet. Where clients are seduced by the current size of the transfer values on offer, I would look to dissuade them from proceeding at the earliest stage possible if it is clear that the transfer is unlikely to be suitable. Noone wants to charge fees to give advice which they don’t wish to listen to. So an amount of triage is required to try and help the potential transferee not proceed at the earliest stage possible so as to avoid incurring fees which end up failing to meet their preferred route. There are other companies who are prepared to carry out insistent client transfers and who will produce reports recommending not to transfer but then agree to execute the client’s wishes with lots of disclaimers. I understand why such services exist but would not choose to adopt such an approach. The rules requiring clients with guaranteed benefits in excess of £30,000 are there for a reason. I might argue that £30,000 is too low a limit for this protection (but won’t do so) but believe very strongly that it is a necessary rule to protect people from themselves. I believe with current transfer values often more than 40 times the value of the revalued income given up, this alters the balance towards transfer for those people for whom it is potentially suitable and appropriate compared to three years ago. This is because the long term investment risks tilt in their favour if the amount they are starting with is more than 80% higher than the equivalent transfer value on offer three years ago. However, gilt yields being much lower, the balance is only significantly tilted if gilt yields stay this low at the time when the pension income is being bought. In essence for those who want and need the guaranteed income provided by the existing scheme there is very little reason to transfer out, but for those who do not need the income and intend to actually make use of pension freedom flexibility then the very high current transfer values make it more realistic to transfer away. It is not so much the pension freedoms that have led to an increase in transfers out, it is the massive increase in transfer values. Pension freedoms have heightened public awareness and interest, but it is the current perfect storm of LDI defined benefit investment, historically low gilt yields and resultant high CETVs that have led to the increased transfers out. Hope this helps Phil. Brian