The original blog published here has been the subject of certain threats by Tideway Investments both to me and to my employers.
I have no intention of letting this blog get in the way of my daily work by defending the positions it takes in courts of law.
I would remind readers that what I write, I write in my own time, in my own name and though I will refer to my work with my employers, this blog is nothing to do with them. So please do not go whingeing on as if it was!
If you want to read what Tideway is saying, the links is below; if you want to read what the Pension Regulator is saying, the link is below.
It is unfortunate that the excellent debate – which you can find in the comments to this blog, has been curtailed by these threats, however it will be renewed later this month.
If you would like to be a part of the Great Pension Transfer Debate on June 19th – you can do so via this link! Free speech assured!
http://www.thepensionsregulator.gov.uk/guidance/guidance-transfer-values.aspx
Tideway’s guide to Final Salary (why not “defined benefit”?) transfers. https://www.finalsalarytransfer.com/Uploads/1435150910Tideway-Guide-to-Final-Salary-Pension-Transfers.pdf
FT article on active members transferring living funds; https://www.ft.com/content/4c94c112-3f96-11e7-82b6-896b95f30f58
Money Observer article; http://www.moneyobserver.com/our-analysis/pension-dilemma-659000-today-or-22000-year-life
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Dear Henry
I follow your blog and share your views on DB schemes. As a PTS I find myself constantly trying to explain the value of DB schemes to clients and advisers, and have often quoted from articles and comments on your blog â so please keep up the good work. Too often it seems it is the blinded being led by the blinkered.
Anyway, in response to your article below is the relevant section of correspondence sent to SGN members during April / May, which led to a stampede of transfer requests. What made this one especially bad was that active members were also sent it, so not just people wanting to transfer but to opt out as well.
Kind regards
Karen McGrath
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Karen McGrath
Chartered Financial Planners
Director
Head Office: Skerritt House, 23 Coleridge Street, Hove, Sussex BN3 5AB
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T: 0203 206 1066 F: 0207 283 1051
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I do increasingly worry about DB transfers. Having attended a regional IFA conference this week (with an excellent factual talk from Royal London about their experience with FAD, among others), I would appear to be well out of kilter with “The Market” in DB transfer advice in that I don’t charge ongoing “ad valorem” fund-based fees. It seems that the overwhelming majority take between 0.5% and 1%, sometimes more.
So, on £500m, that’s about £5m a year “trail”, for example, and maybe, just maybe, “The Market” is being skewed in favour of taking the transfer or am I just being a cynic?
We have been here before!
It’s a high risk strategy for some and a calculated risk worth taking for others. Most sensible folks would not pay 0.5%-1% a year for ‘ongoing advice’ if they had £500k under management surely? People are using Hargreaves, Fidelity etc but also Interactive Investor, Share Centre, etc. £100 a year and low cost passive funds, ITs, shares, etc.
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Vanguard look like they will enter SIPP market at some point with 0.15% platform charge and low cost lifestyle approaches. They have launched already for ISAs.
____________________________________________________________________________ Fixed fees and reviews periodically paid for on a ad hoc basis (if needed) would make more sense I think. Some advisers now record CETV conversations (with permission) and with more sophisticated clients you are more likely to get (fully?) informed decisions being made. Remember those with £500k CETVs also are likely to have a number of pensions tucked away elsewhere including the odd old DB plan.
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They may be taking a pragmatic stance that ‘I have the bedrock income sorted, but I fancy some flexibility with the rest. Perhaps they want to finance a small business? Buy commercial property or help children etc? I do worry about ‘ordinary folks’ transferring out 40 years’ worth near retirement, especially if it is going to somewhere abroad and investing in unregulated investments – this trap/scam? needs closing and fast – http://www.fastpensions.co.uk looks a prime example!
Interesting…
My recent experience with regard to Trustees having no impact on CETVs differs…
I am a deferred member of a DB scheme (I won’t say who its with, but it rhymes with Royal London) As at last Triennial, 31 december 2013 the Scheme was 103% funded.
I requested a CETV as at 31 May 2016, and again at 6 January 2017. My other DB CETVs had risen markedly following BREXIT and the fall in base rate.
To my surprise, the latter CETV had actually *fallen* to 82% of the previous value.
Naturally I queried this, and Willis Towers Watson quickly replied that
“In November 2016 the Trustee conducted a review of the transfer value basis, as they are required to do on a regular basis, which resulted in new assumptions being adopted and led to a decrease in your transfer value. The basis is typically reviewed in detail every three years following the triennial actuarial valuation. The Trustee will also usually carry out a light-touch review once a year to ensure that the basis remains reasonable.”
Interesting…
Specifically, this (in surplus) DB scheme had changed the discount rates used to calculate the CETV. The pre retirement rate went from 6.34 to 5.34, but the POST retirement discount rate went the other way – from 3.96 to 4.56.
Now, I’m not an Actuary and have only a middling understanding of investment matters but I struggle to understand the investment rationale was behind these changes in discount rates going different ways.
I’m pretty sure that the ONLY reason the rates have moved in this way, between Triennial valuations, is to decrease the CETVs.
Mike – this is too complicated a question for me to answer simply so I will refer to my actuarial friends and give you a simple answer!
I’ll thank you not to imply that I’m clever!
(Thank you )
Hello Henry,
Its a shame you did not come to the conference and hear the talk and subsequent Q&A session that put these slides into context.
I agree with your comment that CETVs are non negotiable. We speculate that the reductions in values offered in the schemes mentioned is down to increased outflows through the transfer option and trustees obligations. If you have a better explanation I would be keen to hear it.
The BA scheme reduction was announced in their ‘Trustee’ news letter which can be read hear:
https://www.mybapension.com/resources/news/naps_trustee_newsletter_2015_Q4.pdf
This pre announcement caused a rush for the exit door…not us. RBS gave no notice to their changes in the summer of ’15 , SGN made a similar announcement at the end of 16 for a forward date with the same panic effect on members as the BA announcement. Again nothing to do with Tideway, but as an adviser active in this space we get to deal with these panicked members.
The panic in members is also caused by the likes of Tata, BHS and the media not Tideway. To the contrary we spend time reassuring members of FTSE 100 blue chip company schemes with resilient covenants, that in fact their benefits are going to be paid in full and fear of this is certainly not a reason to consider a transfer.
I’m sure if we met Henry, aside from establishing a shared love of boats you would quickly recognise that we are one of the good guys. We have a great website, issue plain English guides and work hard on our PR. Aside from this we do no selling. All our advisers are employed on generous basic salaries without any incentives around specific cases or business volumes. All our inquiries are in bound from members who have usually read our guides, thought about there options and have sensible plans and ideas as to how to take advantage of pension freedoms and a generous CETV. We facilitate transfers to DIY platforms, other wealth managers and advisers as well as offering an end to end service for those who want that. Our 1% contingent fee is both competitive and hugely popular with consumers, it actually makes it easy for them to pull out at any time if they decide to stick with the scheme benefits and some do as you would see if you read the testimonials on our website. We are absolutely not pushy and do get a huge amount of repeat business from schemes where we have become the trusted firm to use.
Mercers are now predicting around 40% of DB actives and deferreds will want to transfer. The Pensions Regulator tells us that probably 80,000 members transferred in the 12 months to 31/3/17, Tideway has completed around 1% of these by volume and 2% by value. We are not alone in meeting an increasing level of customer demand.
How many DC pensioners are buying index linked annuities at NRD these days? Not many, and quite correctly. Who given the choice would lock in capital at today’s annuity rates and can predict that the income they will need in their 60’s will be the same in their 80’s and 90’s. That’s assuming they can any way afford an indexed annuity to meet their age 60’s and 70’s income need, most are a country mile away.
I lost both my parents before age 75, my parents in law in their mid 80’s can live on two state pensions per month quite happily and have a DB benefit to spare, but just had a £25,000 stair lift fitted after one fell and broke a hip, try doing that on a defined benefit. My 95 year old next door neighbour gets three visits a day at home costing in excess of £2,000 a week, again try doing that on a defined benefit. I think I have a pretty good comprehension of what retirement looks like.
Fixed life time incomes bought at today’s interest for 60 year old’s are unlikely to prove fit for purpose. It therefore should surprise no one, especially an actuary, that 50 to 60 year old’s offered such large sums of money will prefer flexible access to a conservatively invested fund over an annuity.
Yours
James Baxter
Tideway
I didn’t come to the concert because the thick end of £700 and a day not consulting is too rich for my blood. Al Rush has arranged a conference for practitioner which is free on 19th June and I’ll be going to that.
The question about panic buying and selling on the “buy now while high CETVs last” is in the front of my mind. Ironically, the volatility in CETVs is now linked to the gilt rate as many schemes use best estimate valuations for schemes with little diversification.
Those schemes with a balanced investment approach – eg – a decent proportion of growth assets produce lower and less volatile CETVs.
Smart advisers can focus on schemes with high gilt allocations and be pretty sure of a low critical yield on the TVAS. These schemes look like annuities because they are preparing for a buy-out into a bulk annuity. But that high CETV reflects the high level of security in the ceding scheme.
Ironically, the schemes which are still “investing” are producing lower CETVs , because they are using higher discount rates ( on a best estimate basis). For these schemes, there’s a lot less CETV volatility (the virtue of diversification) – so they get less transfers.
If there is a panic sale, it is that the gilt curve moves against transferors, but this is speculative in the extreme. High CETVs are high for a reason, they reflect the security being given up. The cost of that security is not a discretionary calculation, the decision to take a CETV should not be based on whether the transfer is a good or bad deal but on the fundamentals.
I appreciate you know some old people but are you going to be around for thirty years for those in their fifties to really need you? I question whether the decisions being taken by most transferors are properly considered. Whether they have a proper understanding of the duration of retirement and the liabilities of later life.
Henry, CETVs have always reflected the security being given up. The reason they’re so high now is in the main due to very low gilt yields.
I know you know…
Unmarried people with older children could also benefit, given the scheme pension payment to “dependents” on death will be very small, but a pension transferred to a PP will be fully available on death before 75, and only taxed @ recipient’s marginal rate on death after 75.
And they only get taxed on the ££ they take; whatever remains is available to their nominated beneficiaries…
I appreciate there is a re-shaping argument, but it is often overplayed – as are the various taxation arguments. As one of my friends posted today – we really need to get to the bottom of what is happening to the money once it is transferred – there are societal consequences – see Merryn Somerset Webb in FT today on societal advantages of vfm personal investment.
A thought, CETVs are high, no one will disagree, because the cost of securing a pension has increased and changed the assumption behind the calculation. In my experience most people transferring, when armed with all the facts, tend to be after the immediate cash in the tax free element – I emphasis most I know there are many reasons. Equally most people who do not want the immediate cash tend to stay on the basis of why take on risk and fees if you don’t actually want to use the asset until you do.
I wonder what the cost of a buying a pension will be in 5-10-15 years etc time. Might interest rates have risen. Might CETVS values decreased and the cost of purchasing annuities plummeted.
My point is that no one knows and we should try to be guided as much by personal objectives as much as fancy and too clever by half maths.
My recent experience is similar to Kevin’s in that people with “high” CETVs usually have something “special” going on when they make an enquiry. This might be debt reduction, income flexibility, enhanced death benefits, etc., etc. More interesting is the “psychology” involved, I think.
We would agree that most individuals with “chunky” CETVs on the table have been successful in their careers to date and they tend, I find, to employ the argument of “control” during discussions. Leaving things as they are, for better or worse, involves a perceived loss of control and some individuals find that a problem.
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