To his credit, James Baxter of Tideway (who I have criticised in a recent blog for selling not advising) , has posted a reasoned response. The key matter for me is whether members of DB schemes are being panicked out of them by the prospect of falling CETV rates. I post my views in my response to James’ self defence. Reading both comments – lengthy as they are, may be helpful in understanding the fundamental dynamics of the great transfer debate. I post both James’ comment and my response without further comment, if you haven’t read the blog in question – it is linked here
RESPONSE FROM JAMES BAXTER OF TIDEWAY
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
RESPONSE TO JAMES BAXTER from HENRY TAPPER
I didn’t come to the event 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 fundamental for the “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 of someone’s financial planning.
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.
“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.”
The ‘but’ here is not quite right, surely, Henry. It reflects the high cost to the scheme of self-insuring (matching) its liabilities. As long as the member values the covenant provided to all by the PPF it can be indifferent to the security of the scheme. It only enters the member’s consideration as a calculation of its probable income-purchasing power in the presence of risk taking by the member.
‘Smart’, Henry, yes, but also any adviser owing a duty of care and being under a regulatory requirement to act in the client’s best interests. If a client wants an index linked annuity (as James Baxter pointed out to you) it will cost them a lot of money or leave them with a very small real income – a choice very few make with any of their own resources. But it must therefore follow that if the investor who rejects that very high cost can get the income they want because the scheme has been prepared to pay what it costs, they should take the cash and invest it differently. It’s a very simple bit of mathematical reasoning.
The opportunity arises only if there is a difference between the scheme’s utility (under the combination of FRS19 and Pens Regs) and member utility; and it only lasts as long as the QE-derived negative ILG yields.
The fault in this argument, if there is one, is if negative real yields are not a non-market monetary-policy aberration and are instead a perfect forecast of very low future equity real returns. But as I have said many times before, if that is so then most apparently risk-free alternatives will also default, including probably inflation indexation and the mutual PPF.
The “special offer” rates produced by QE are like an over-extended ETV (enhanced transfer value). In the short-term , everyone’s a winner – in the long term- I’m not so sure. The enhancement is weighted to ceding DB schemes with high gilt allocations, these typically have strong employer covenants as the asset strategy is v expensive. As I say elsewhere, these super secure schemes offer CETVs at a premium , is this reflected in the typical TVAS?
If you mean, does the typical TVAS report point out the strength of the covenant where a scheme has derisked, isn’t that making the error I alluded to, namely failing to recognise that the purpose of trust-based funded schemes with regulatory controls together with a mutual protection scheme is to make members fully covered by the scheme largely or entirely indifferent to the idiosyncratic risks of their own scheme?
The TVAS report has two purposes. One is to identify the resource cost (or income for same resource) of replicating without risk the DB income reflecting its own form and quantum. This is pointless as it is rarely going to provide on its own a reason to transfer. The second is to identify the required return with risk taking to achieve the same lifetime real spending power allowing for longevity risk. It does not require an estimate of the probability or confidence level associated with any quantified shortfall or surplus. Tideway, for instance, can tell you where the bar is but has no model to quantify the odds of clearing it. I suspect my firm is unique in this respect.
It would be a bit unrealistic requiring transfer advisers to use stochastic models given the state of the art of quant skills in this market but it is a poor reflection on those skills nonetheless. However, as I’m sure James Baxter would argue, precision is not that critical when the break even growth rate is as exceptionally low as their TVAS reports (and online calculator) show.
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