(Rival) consultancy LCP and insurer Royal London have joined up to produce a paper calling for it to be mandatory for trustees to provide members with the option to take part of their DB pension as pension and part as a cash equivalent transfer.
I haven’t read the paper, just the report on it which you can read here. I am hoping to go to LCP’s event, which you can sign up to here. The gist of the arguments in favour have already been published in an earlier paper with insurer LV that you can read here.
In case the people who pay my wages think I am a fifth columnist for LCP, I’ll add that Steve Webb, co-author of the LCP work has spoken with First Actuarial on this subject at the Great British Transfer Debate; we are keen to promote constructive debate and like LCP – are looking at this from both the Scheme and the Member’s point of view!
So why should Trustees (and sponsors) have to go to the bother?
There is no doubt that there will be administrative problems producing bespoke quotes for members who want to look at their DB benefits as an hybrid.
A part of me says this is not worth the candle. Members can already get a proportion of their DB benefit commuted for cash and small DB rights can be totally commuted as a matter of course.
This paper is calling for more; it’s saying that the “all or nothing” regime that five out of six pension trustee boards impose on members is making for poorer decision making at member level. The argument is that members should be free to exercise a higher degree of freedom than is available through commutation as part of their pension planning. Trustees should be forced to provide transfer values for all or part of the DB benefit.
There is an administrative cost to this and tomorrow I will see LCP’s numbers. We have looked at the numbers too and we think the cost is significant. That cost will have to be passed on to employers.
I suspect that the business case made to employers will be that higher levels of transfer are worth the candle. Bosses are accounting for DB liabilities using an accounting standard that inflates the liability, the CETV is calculated according to “best estimates” and pays out a lower value. In most cases, CETVs (when taken) relieve the balance sheet and make lives easier for bosses.
From the public policy perspective – is this part of the freedoms?
To an extent, I agree. In principal, people should have absolute property rights on their pension benefits, as they do on anything else they own. But pension rights are different. People have no property rights on unfunded state pensions (such as the civil service scheme or indeed the State Pension – that we all enjoy).
The only DB pensions that give a right to a cash equivalent transfer value (CETV) are those that are funded (most of which are in the private sector). Even then you only get a right to a CETV before your pension comes into payment. Partial transfers will only be available to a proportion of those with DB benefits and this could be seen as divisive.
I’d say that it extends the freedoms but only to a lucky few. We will need to work hard to manage expectations – split transfers are a small step and not a game-changer.
Is going halves on DB really in the member’s interest?
Here is my thinking on the demand for CETVs among those with deferred DB rights.
Most people who have the freedom to “cash out” using a CETV , do not use that freedom. I did not exercise any freedom – I didn’t even take my tax-free cash, because I knew the value of my Zurich pension was always going to be higher to me than the value of having £1m + in an invested pension pot (for which I was responsible).
The question is whether I might have been happy enough with a £300k or £500k pot. I suspect that I would have preferred not to be tempted (but I am a pensions geek!)
I am not the only person who has become a pensioner since April 2015. We should remember that any legislation passed won’t unwind decisions like mine! There will be some pensioners who will complain they were unfairly treated because they didn’t get a split CETV and were never advised they could have got one if they’d waited.
You’ll notice that my CETV was huge and the argument seems to be focussing on those of us lucky enough to have big CETVs. Presumably we are those lucky enough to have financial advisers to look at all this for us and we probably have a SIPP with Royal London or LV or some such organisation.
There certainly is a lot of sell-side vested interest in loosening up the transfer rules and this adds (a little) to my fear of freedom.
“The scammers slice”
What adds a lot to my concern, is the possibility of split transfers where the transferable amount is below the non-advisory limit (£30,000).If this were allowed, it would mean that all kind of scoundrels could slice off a small slither of pension – up to £30k into some ne’er-do-well investment scam, beneath the regulatory radar.
There seems general agreement that split transfers should be limited to larger transfer values – I’d go further and say that the minimum split must be above £30k and therefore advised.
A complexity too-far?
I’m quite sure the majority of people who have DB rights will still take DB pensions. The numbers that can afford to look at CETVs in detail are relatively small, the numbers who will be able to afford the detailed advice needed to get the precise mix of DB and DC rights – smaller still.
From the member’s perspective , I wonder if split transfers is just a complexity too-far. I suspect that I am not alone in not wanting to be aware of my options to cash-out! To an extent you could argue that we are creating an “unwanted awareness” here.
I want split CETVS but….
Provided the cost of publishing CETVs on all DB statements and split transfers as an option (the paper calls for both) is not too high- I am in favour. I will find out what the cost is tomorrow, thanks to LCP for giving me a (cheeky) place!
I’m not sure that split transfers need to be mandated, I think they could be encouraged and incentivised. But I’m keeping an open mind on this.
In the final analysis, the interests of members, of schemes and of sponsors all need to be aligned to make the business case for CETVs work.
Finding that alignment is going to be hard, I suspect that it will come down to whether offering a split CETV improves the overall value of the DB pension scheme.
I expect that if you give people options to manage their pension as they like , then you give people the ownership of their pension. Doing this restores confidence in pensions, which might be the measure of value we are grasping for.