A new twist to the Pension Transfer Debate has been introduced by Willis Towers Watson (WTW) at a seminar last Tuesday at their London offices.
At the event, consultants reported a ripple effect caused by the surge in members transferring out.
WTW have done their own research which shows that schemes are losing members fastest where CETVs are over £500k where members are engaging with the message “more cash now plus more flexibility overall”.
WTW’s message is that “facilitating paid-for impartial financial advice can dramatically increase the numbers transferring”.
WTW’s extensive data illustrates that only those members who are already informed about pensions and able to fund their own advice are able to access the flexibilities.
Through this series of logical steps (the ripple), WTW argue that extending the provision of financial advice to a wider section of scheme membership, could democratise transfers and accelerate the “Stampede to cash in ‘gold plated’ final salary plans” (FT headline).
At the same time, it could accelerate the stamped to buy-out of those same schemes, ridding UK Plc of the awkward problem of being partially accountable for its staff’s retirement experience. This after all is the long-term aim of the Regulator’s “integrated risk management framework”.
Obstacles to transfers can easily be removed
Having established the case for financial advice from the member’s perspective, the seminar goes on to look at the impact of such a “stampede” from the scheme’s perspective.
In doing so , they counter four prevalent arguments
- The administration crunch for DB transfer analysis can be eased by bagging TVAS analysis resource using the scheme’s economies of scale
- The impact on assets following the departure of cash can be managed through employing top-notch investment consultants (step forward WTW)
- The lack of awareness of the honey-pot by less affluent members can be solved by better scheme communications (step forward WTW)
- And the DB transfer process can be streamlined by working through your scheme consultants to deliver excellent service through in-house IFAs.
And all this can be self-funding (at least for the scheme)
WTW estimate the administrative cost for an occupational pension scheme to pay a pension is £3,000. But if an IFA can get a member transferred out, that cost falls to £0.
The cost of getting an IFA to engage with a member is reckoned by WTW to be £900. WTW estimated that about two thirds of members would engage with an IFA with about half choosing to transfer out of the scheme after engagement. So a scheme might expect a third of members not to engage, a third to engage and do nothing and a third to engage and to transfer out. On this basis, the cost of transfer advice would more than be covered by the long-term administrative saving to the scheme.
I hope you get the picture. The message is clear. as long as trustees are prepared to meet the long-term impact on the scheme of investment strategy, projected cash flows and funding, WTW reckon that admin savings can fund the cost of reducing the membership of DB plans by a third.
So why would I want to pay my own pension costs?
It is clear that trustees like the idea of helping members to pension freedoms. Superficially they are fulfilling the dream of “more cash now plus more flexibility overall”. Employers are pretty keen on losing a third of their scheme liabilities, that’s a massive kicker to their balance sheet. In terms of reliance on the employer’s covenant, the trustees can demonstrate their journey plan is on track. The Pensions Regulator is watching integrated risk management in action! This is the classic win-win-win.
Beware “win-win-win”, there are no free lunches.
Sorry to poke a stick in the spokes, but there are losers here. Firstly, a third of members will have not only have lost their right to a wage for life , but lost their right to free pension administration (costing £3000) in the process. The cost of that administration should be reflected in the CETV though I have never heard an actuary mention it in the discount rate factors used to value pensions. I would welcome the views of any pension actuaries who can claim to factor in that £3000 into their CETV calculations.
My suspicion is that members who transfer are picking up this cost which is a fixed cost (not varying with the size of the transfer). So the lower the CETV, the higher these admin costs are as a percentage of the cash transferred.
This “£3000 admin cost” is truly the cost of the pension – as a wage in retirement. For those in the Royal Mail scheme, it is one of the things you don’t get from a DC scheme or a cash-balance scheme, that you do get from a career average scheme.
I wonder how many TVAS style analysis, factor in the £3,000 admin saving to the scheme? I wonder how many SIPP drawdown plans are able to match the efficiency of a large occupational pension scheme in paying pensions? I wonder if those who cash out a SIPP for a big bank balance, ever consider what they have lost by way of the administrative structure of a pension wage for life?
Why would anyone want to give this up? Presumably the lure of “more cash now plus more flexibility overall”.
Not enough friction
The WTW seminar was entitled “DB Transfers; Seizing the Opportunity”. I remember going to a similarly entitled lecture given to me by Allied Dunbar in 1987.
The power of “more cash now plus more flexibility overall”, is so great that it could solve many of the problems with DB schemes overnight. By encouraging another third of members to take CETVs by using good scheme communications and employing IFAs, schemes can seize a massive opportunity for short-term gain.
However, the impact of that 1987 seminar is still being felt today by the millions of people outside pensions who were either mis-sold or knew people who were mis-sold a dream that never materialised.
We need friction in the system and that needs to come from people asking serious questions about what we are doing. In my view, many occupational pension schemes are paying out transfer values which are too high, and many people are undervaluing the long-term benefit of a wage for life.
I do not think that the idea of encouraging transfers this way is good news at all. It smacks of all “win-win-wins”. The losers of these schemes are those who do not have the capacity to administer their own pensions or the means to pay others to do it for them.
WTW can point to the IFAs as capable of doing this, but I question the capacity of the IFA industry to manage the surge in DIY pensioners, that a frictionless system would create.
Pensions are hard, pension schemes are serious mechanisms that people seem to under-value. More questions should be being asked about the plans being put in place to dismantle them, for they are much easier to demolish than rebuild.