The FT published a number yesterday – £100 million. It is the amount that pensions administrator JLT are paying out in transfer values every month. It looks a large number. Mischievously I suggested that might be revenue to JLT rather than the money processed. What followed was a long and constructive discussion on the responsibilities of trustees towards members looking to transfer cash away from DB plans.
My suggestion was not entirely facetious. The information I am getting from my contacts in large pension schemes is that at least two schemes are seeing CETVs leaving the scheme at more than £250m. That means these schemes have lost more than £1bn in assets (and liabilities) this calendar year – already,
I have no source to corroborate this so you will have to take my evidence as anecdotal. Any journalist that wants to know the schemes will not get names.
My point in raising this is that the estimates so far (from the big three actuarial consultants – Mercer, Willis Towers Watson and Aon) suggests that since April 2015, the aggregate amount leaving schemes from transfers is around £50bn. I would suggest the number is considerably higher than that.
The best way to get these numbers is from scheme accounts and particularly the numbers within the FRS102 accounts that organisations are required to provide to account for the impact of the pension scheme on their financial position.
In terms of FRS reporting, the extent of CETV transfers will not be under-reported. CETVs are good news for the balance sheet; they represent liabilities leaving the scheme on a more favourable basis than their book value. That does not mean the CETVs aren’t fair value, it just means that “book value” carries a degree of prudence in it that is not included in the transfer value calculation.
So the higher the aggregate CETV number, the better the news for the company’s balance sheet. There is a useful piece of work for any researcher out there and that is to identify the trend in CETV reporting within FRS102 pension reports of the large companies.
I suspect it will show the following
- That CETV activity is highest where the membership of a scheme is financially aware. Despite scammers praying on vulnerable unaware members, most money flows into sophisticated products such as SIPPs and as a result of paid-for advice.
- That CETV activity is highest where employers are financially strong and capable of locking down liabilities with gilt and corporate bond orientated investment strategies. These strategies give best-estimate CETVs using gilts + discount rates that make for very attractive valuations
- That CETV activity is particularly focussed in schemes sponsored by financial institutions (banks and insurance companies) where a combination of (1) and (2) are in play.
If , as my anecdotal evidence suggests, some of these schemes are transferring out money at a rate of £3bn a year each, then estimates of the total CETV run rate may well be considerably north of the £20-25bn pa that is currently knocking around.
If I am right, we will only really understand the nature of this exodus retrospectively. Worryingly, there is no means to reverse the trend, CETVs are a one way valve (unless we return to the restitution practices that followed the pension mis-selling crisis following the introduction of personal pensions.
Is there a problem?
In the short term, there is not a problem. Corporate balance sheets will benefit from CETV activity (see above), individuals will have unheralded liquidity and the economy should benefit from the spending of pension cash “liberated”.
The problem is not in the short-term. The problems is that the savings consumed today are not around to pay tomorrow’s bills. They cannot be used to pay for long-term healthcare and will mean that there is a greater dependency on social security and the NHS in years to come.
In terms of Big Government, an escalation of voluntary transfers out of DB schemes of the proportions I suspect we are currently seeing , is worrying. It would take the Institute of Fiscal Studies, the Pension Policy Institute (or similar) to confirm this hypothesis and I hope that someone, as I type is working on just such a project.
What happens to the money?
The utility of the money set aside to pay pensions is currently a matter for occupational pension trustees. If transferred the money will be invested at the discretion of individuals with the help of wealth managers, financial advisers and the asset managers they recommend.
Money invested, as opposed to that spent on lifestyle items, is likely to be spread more diversely than were it to have stayed in occupational schemes. It may be invested wisely or it may be squandered in stupid or even unscrupulous investments but it will not be money focussed on the purchase of pensions – as is the case with occupational schemes.
The money that has left occupational pensions is – if the CETV levels are as high as I suppose- likely to change the long-term investment strategies devised meticulously by investment consultants. The financial models that actuaries use to predict cash flows from pension schemes did not predict as much as 5% of liabilities of the scheme being called upon in a year to pay CETVs.
The immediate call for cash will mean a partial unravelling of the meticulously crafted LDI strategies most large schemes have in place and this will prove expensive. This cost will be born by the trustees and passed on to sponsors by way of demands for improved funding. Hopefully this will be forthcoming – the sponsors having benefited from the FRS102 improvement – however, accounting benefits are short-term and the legacy of CETVs is long-term. I worry that CETVs may weaken the financial position for those who stay and the patience of scheme sponsors who will benefit now and pay later.
Is this thought through?
I observe as an outsider and not as a scheme actuary or an investment adviser. I am not a pension trustee either.
In my view, there is a disconnect between what is happening at ground zero (by which I mean at the level of individual financial advisers who are being overwhelmed by demand to transfer); and what is happening at the top of the tower block (by which I mean the trustees, their advisers and those commentating on the situation). I would put on the very top of the tower the Government and its Regulators.
I suspect that there is an absence of strategic thinking about what the staggering outflows from occupational defined benefit pension schemes actually means.
When those at the top of the tower have caught up with those at ground zero, we may find that much of the damage to scheme infrastructure and indeed the long-term social security strategy of Government has been done.
Instead of pensions – we have pension freedoms – a massive reflationary exercise where long-term money is swapped for short-term consumption; where fund managers and advisers are handed a windfall of billions of pounds and where the consumer- the member or (in future) , the policyholder, is unaware of quite what’s happened.
This may be for the best – but I don’t think it’s thought through. We usually found that the unexpected consequences of badly thought-through pension policy, are not good.
