I have been following a series of tweets from Jo Cumbo; they concern an interview with a man who has recently “encashed” his pension with the cash being invested in a drawdown product. He is 57, has worked for British Steel and he is confused.
So why was this ex steel-worker wanting out of his final salary pension?
There is no sense of how he feels towards his former employer but it’s clear he had little regard for the pension he had given up.
Infact – it turns out that the decision he has taken has worked out well so far and his money has doubled (he is on the “right side”)
Here is someone who has lost his livelihood and is looking for certainty. Ironically he has swapped the certainty of his defined benefit for an investment about which he knows nothing. Had this man been invested through the financial crisis , who knows what his predicament might be now. The only certainty would be trauma.
The only certainty from “stressed” markets is trauma
This is great campaigning journalism by our leading pension journalist. The series of tweets asked me to consider what my reaction might be were I in this man’s hoes.
That he had built a six figure sum and subsequently doubled his money suggests he had worked for much of his life in steel. That he had taken financial advice and made a decision based on what was right for his wife and children suggests a responsible man. That he knew nothing about where the money went but had trusted his advisor suggests a respect for the advisor and his profession. I think it fair to conclude that Jo was speaking to a very decent man.
There is nothing in Jo’s account to suppose that his planned inheritance will happen soon, he is living on his tax-free cash and – at 57- has his taxed savings intact. If markets continue to do well he may draw down less than the growth on his fund, he may well be able to provide himself with a replacement wage for life and even leave money for his family when he dies.
But there are a lot of “ifs ” here and his trust is in a mechanism he knows nothing about, he is flying by wire and in a passenger seat.
There are 130,000 people in the British Steel Pension Scheme, most of them are pensioners but well over 40,000 are still to draw their pensions and could well take the option this man took.
The British Steel Pension Scheme is commonly thought of as one – if not the – best run pension scheme in the private sector. Last year it returned 19.1% on its investments and though it runs a small deficit it has some of the lowest per capita operating costs of any funded pension scheme in the land.
As is well known, the Scheme will close soon and its deferred members can choose to migrate to a new British Steel Scheme, transfer away to a personal pension scheme- or- if they do nothing – have their benefits paid by the pension protection fund.
What we can be sure of, is that these choices are not easy, as I have written on this blog before, there are occasions when the PPF may represent the best option though many will choose to keep their money managed by the trustees and their investment team.
I am happy to report that these members are getting the care and consideration they deserve and that both the Scheme and its sponsor are acting in a responsible way to make sure that where decisions are taken , they are taken with blind faith but with deliberation.
The new scheme has secured a considerable cash injection and a stake in the continuing business run by Tata, this is a tremendous improvement on the original position faced by those in the scheme. in particular the pensioners have very much to gain from continued participation in a private rather than a PPF paid pension.
For a very large number of the 130,000 British Steel Pension Scheme members, there is considerable certainty about their pension rights.
Our job’s to restore confidence in pensions
It is incumbent, not just on our journalists, but on all those who know about pensions, to point to the security offered by occupational pension schemes as a source of comfort to those whose jobs and pensions have been “at risk”.
This message is too little heard ; it is the still small voice of calm in the hubbub of “pension freedoms”.
I totally “get” how the gentleman Jo spoke to came to his decision. He did so because he had lost all emotional attachment to his pension scheme having lost his future with British Steel. This man voted with his feet – whether out of frustration and anger, out of fear, or out of trust for his advisor. He certainly did not understand the decision cerebrally.
Our job, and I mean by “our” everyone who can subscribe to my wish to “restore confidence in pensions, is to promote the certainty of a well run pension scheme over the “hit and miss” situation this gentleman now finds himself.
That is not to say that transfers do not have a place, but there is no place for the confusion described so well by Jo. People either need to know what they are doing when managing for themselves of have confidence in those who manage money for them.
This gentleman seems neither to have confidence in what he has or what is lost. I suspect in both cases he should be reassured.
Technology will be the enabler for a whole new compliance regime from the authorities. Whether an advised or non advised sale the future will be that the customer’s understanding will be tested and recorded.
The only politically uncomfortable part of this is those unable to understand will be denied access to their money under things like pension freedoms but I think that’s a price worth paying. Adrian
For once, I disagree with you Adrian. I think technology’s ability to assess understanding is a long way off. It will come but not in the near future.
I’m afraid that I can’t see technology helping most of the 130,000 that much. Over 100 are over 100! Most of us are only able to focus on these vital life-changing decisions with great difficulty and need the help of super-skilled experienced communicators. I have little faith in the Pensions Dashboard and modellers to create self-service solutions for the majority of us!
I have little faith in modellers and dashboards too.
They just paint pretty pictures but avoid the unknowns.
The best modellers I saw were ‘super’ modellers because actuaries fired in their probabilities and gave a range of outcomes, but even then the actuaries maths painted pretty pictures and avoided the ugly unknowns.
If you tell people they may have nothing in DC, then I think they’ll wake up to the value of DB.
While DC is sold with only the pretty picture (and small print and pages of ‘I agree continue hiding the bleak bits), it’s no wonder people cash out of DB stuff.
And to think these people are considered adults, yet they still treat their lifetime of finances like a child and let others deal with them acting like their parents.
Maybe some painful lessons are what people need to grow up and take responsibility?
Isn’t it becoming clear what will happen here? Most people I meet in the course of my work have very different and admirable skill sets to me, whether scientists, authors, stonemasons, shop sales workers, or delivery drivers. I’m always impressed at their knowledge and abilities.
When it comes to their pensions, however, the eyes glaze and “soundbite advice” is what they have heard from their mates and/or social or MSM. So, it seems that rather more people are being persuaded to whip their juicy CETV into a PPP or SIPP (with high cost DFM portfolios attached).
Setting aside the pros and cons of DB transfers, surely the FCA (and most decent advisers) are much more worried about the transference of investment and costs risk to the former DB scheme member? I think that the investment risks have really never been higher in my 30-year career as an adviser. Gone are the days of relatively secure S32 policies and so on – we are left with so-called “balanced portfolios” of open-ended investment funds and or insured funds. We have had a good run in the markets, but I fear that these halcyon days are coming to an end.
As Jonathan Ruffer recently wrote:-
“Our call that inflation is on the way is the irresistible conclusion which one must draw; in the world that is passing, it was asset prices that went up; in the world that is coming, it will be wages and retail prices that go up. The credit crunch of 2008 was the natural onset of the cold winter which removes the excesses of the long prosperity which preceded it; the Fed turned the radiators on, thereby artificially prolonging the summer, and that it, too, is ending, we are looking once again at the elemental corrective to economic excess – a destruction of savings.”
When the markets tumble, which they surely will, on whose door will the steelworker knock?
Henry – if the adviser is indeed a regulated “Independent” financial adviser, then there is hope. If it turns out that the “IFA” concerned is not actually regulated, then the apparent doubling of the fund valued may be illusory. We must hope…