“Cry havoc and let slip the dogs of war”

cry havoc

One of the features of a close-knit community is that people talk to each other. For Steelworkers this has been at works and  in clubs.

Now the works and clubs of Port Talbot, Llanwern, Scunthorpe and Redcar  have digital counterparts in the Facebook pages managed by Stefan Zait and Rich Caddy.

This post is about the conversations that begin on those pages and lead to discussions via email and other messaging systems. If we want to understand how decisions are being taken by BSPS members , we need to recognise we are in a digital age. The rapid free-flow of information has its own risks, as I am about to show.

The nature of the risk

A post on one of these pages signalled a worrying development for those fearful of the consequences of DB to DC transfers.

Hi, my investment is with Vega algorithms via Gallium via intelligent money via Darren Reynolds /active Wealth , just checked my investment, it’s down -0.32, could you advise next step please.

Steelworkers know how to use a calculator, that 0.32% fall in the investment might be equivalent to a week’s wages.

The post is followed by another “investor”

“Mine is same. Down 0.02%”

Of course it is not uncommon for daily unit prices to fall as well as rise, these steelworkers are going to see this happen almost as often as they see them rise and with on-line access to their Gallium accounts.

There could be a lot of sleepless steel men over the next few decades, unless people understand the nature of their risk

 Why DC is different

It is difficult to put your shoes in those of a community of workers who for the past five decades have been assured pensions that don’t go down in value. But that is what Port Talbot is – and many other steel towns.

For thousands of steelworkers moving their DB entitlements to Defined  Contribution pots, that certainty is gone.

The basic message that past performance is no indication of the future is not one that is getting through to most of the people with whom I am speaking (or messaging).

Here is someone with £590,000 in his account (he’s given me permission to quote anonymously),

“a FA has told me (and others) that Royal London have averaged 10% over the last 10 yrs and I could have the potential of having £1.1M in my pension when I’m 60. Whether those figures are exact or an exaggeration I’m not sure, but that gives a lot of flexibility come retirement”

For an opinion on Royal London, I asked Al Rush who’s replied

The Governed Portfolio range has ‘only’ been going for eight years or so.  I think it’s a great choice of fund.  With a portfolio of that size, the all-in charge (including advice) after transferring out should be somewhere in the region of c.1.2% – if transferring is the right thing to do.

The bold “if” comes from Al.
I am not in a position to comment on the rights or wrongs of specific investment but I do think that giving people expectations based on past performance goes against the letter and the spirit of the law.
We are in an era of low inflation (the new normal as experts call it). We can expect long term equity returns to give an above inflation return (the liquidity premium), but that does not mean that 10% returns are on the cards.
Guys – DC is different because you are taking the investment risk, not Tata.

The cost of the risk

I’ll take Al’s word for it that the cost of the Governed Portfolio is 1.2% pa. I’ll take my correspondent’s word for it that he will be paying a 1%  advisory fee. I would like to think that the 2.2% total charge will include the cost of investing (though I fear transaction costs may be on top).

If my actuaries are telling me to expect inflation +3% on my DC pot and inflation is 2%, I can see the cost of the risk this fellow is taking is very nearly 50% of the expected return. In other words, to achieve inflation + 3% , I’d need to get a 5% +2.2% return = 7.2% pa.

That’s a pretty tough call over the fifteen years this fellows got to retirement. The £1.1m figure looks like a 4% net roll up, which still assumes a 6.2% return (and that’s before netting off the £7,500 fee to meet the initial advice.

My simple argument is that this fellow may be able to afford the risk of the Government portfolio’s volatility, but can he afford the advice? My assumption is that if you are paying 1.2% pa for the portfolio, a secondary level of governance on what is a growth portfolio is not needed.

Can you afford all this advice?

The worrying lack of alternatives

My correspondent tells me he is investing into his workplace DC plan at the maximum match (he is paying 10% of salary and so is TATA). This is into an Aviva personal pension set up on TATA terms.

I have mentioned this option before and asked steelworkers if it has been put to them. My correspondent has given me a reply.

When you ask could I invest the CETV into my Aviva DC pension. I was always under the impression that Aviva wouldn’t accept the transfer into this – nearly everyone I’ve spoken to also think this and this would have been the easy option to do.

I am currently investigating whether there is a special clause in the TATA GPP which prevents transfers in and I am asking what the terms applying to default investments into this plan actually are. I suspect they are rather lower than 0.75%.

I am not suggesting that the TATA (Aviva) GPP is suitable for this gentleman’s money, but I am very concerned it he has been given the impression it is not an option,

You have to wonder how such an impression could have become prevalent in the community, when Time to Choose was initiated by TATA and managed by its pension trustees.

Why aren’t steelworkers considering transferrin to their workplace pensions , whether with TATA or elsewhere?

Perverse consequences of conditional pricing

I am also asking Aviva, whether its workplace GPP could, should it be able to accept this man’s money, pay the £7,500 initial advisory fee to the advisor from the fund. I suspect it can’t because the advisor does not have rights to the policy – but more on this later.

If I am right then the cost of the advice goes up, as it will have to be paid for from taxed money and VAT will be payable (as the advice will be deemed to be about transfer advice not about product advice).

Put income tax and VAT on that £7,500 and the bill suddenly seems a lot less palatable.

If I am right, then I can see why steelworkers do not think they can exercise “the easy option to do”.

If the FCA are happy to turn a blind eye to this, then should they have bothered with RDR?

Why do we allow such taxation inconsistencies to persist? “Scheme Pays” could be used for more than the collection of tax.

Putting the answer before the question.

In this blog, I have identified four  concerns I have with the steelworkers  risk transfer from DB to DC. My questions to steelworkers are in bold.

  1. Steelworkers getting agitated by falls in their DC pots – visible online. Are you prepared for inevitable market reverses?
  2. Steelworkers being given unreasonable expectations based on selective use of past performance figures. What happens if you pick a losing fund?
  3. Steelworkers paying twice for “fund governance”. Are you aware of the impact of a 2.2% + yield drag?
  4. Steelworkers getting poor information on alternatives (such as workplace pensions), possibly because of adviser introduced bias. Do you know what you might be missing out on?

To these , I will add a fifth, alluded to in Al’s bold “if”, the gent I’m corresponding to has 15 years till he is 60 and he’s in a well funded DC plan. He has tax-free cash entitlements from his DB plan (whether he move to BSPS2 or defaults to PPF).  In terms of his major concerns, the lack of inheritable wealth from DB, I think he is under further misconceptions. He talks of DB benefits being capped by indexation (not strictly the case as discretionary increases are still possible  (with a £2bn buffer at outset). He talks of his reduced life expectancy as a manual worker (I’ve pointed out that there are more than 100 members of BSPS over 100 years old).

In short I think the fifth concern I have is that the £7500 advisory fee that this man will pay to transfer to a DC pot is just that. That it is a golden key to £590,000 (well call it £582,500).

Cry havoc and let loose the dogs of war

The military order Havoc! was a signal given to the English military forces in the Middle Ages to direct the soldiery (in Shakespeare’s parlance ‘the dogs of war’) to pillage and chaos.

I fear that this is just what TATA has done. It is important that we seek to manage the potential havoc using these digital means at our disposal.





About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in BSPS, pensions and tagged , , , , , , . Bookmark the permalink.

12 Responses to “Cry havoc and let slip the dogs of war”

  1. Phil Castle says:

    Very good as always Harry and highlights the important questions Steelworkers need to be asked/asking.

  2. John Mather says:

    Maybe the DB promise should come with a warning that the value of the promise can fall as well as plummet.

    All we need now is the overdue market correction and we have all the essentials of a compensation fee fest

    part of the compensation will be a cost levy om the decent adviser who probably refused to get involved in these no win repairs of broken promises where the starting point is a lie

  3. henry tapper says:

    I think that fall rather than plummet might be the better description. The cost for most people of going into the PPF is rather less than a “plummet”.

  4. Bryn Davies says:

    I welcome very much the attention you are giving to the scandal of what is happening to the steelworkers’ pensions. But people should realised that there’s no reason to suppose that this isn’t happening everywhere else where CETV to DC transfers are being made.

    • henry tapper says:

      Thanks Bryn and you’re right – this applies to Active Wealth Management too – who have been actively promoting solutions in many other places. The key to this is that it has captured the attention of people who can set up a public enquiry – not just into BSPS but into the wider issues relating to risk transfer through pension freedoms. Of course I welcome your support Bryn – thanks!

  5. Mark Meldon says:

    I get that sinking feeling when reading your blogs about the “South Wales Pension Fiasco”!

    However, here is my tuppence-worth.

    Setting aside, for a moment, the “hold or fold” question regarding the CETV’s on offer, it seems to me that the fundamental problem here is going to be where the CETV is eventually invested rather than just what the charges are, vital as there are.

    If it were me, remembering that I can’t operate a fork-lift truck or blast furnace, I would suggest that few of the BS workers have much if anything in the way of investment experience. That’s not their fault but does mean that they have a lot to take in in a limited period of time. Assuming that a CETV into a “private” arrangement is, in fact the way to go, is it not worth offering something that the individual is more likely to understand?

    My guess is that quite a few of the CETVs flying about are substantial and that some of the members have a more than decent chance of breaching the current Lifetime Allowance, even with very modest investment returns. So, why not offer then, temporarily at least, a cash option? You can set up a SIPP holding deposits and National Savings Income Bonds and you might receive 1% interest, gross, right now. The SIPP might cost, say, £1,500 to establish, but the “running cost” would only be around £250 + VAT a year. This gives the BS member time to understand and agree a longer-term investment plan, perhaps using a handful of “dividend heroes” investment trusts at a later date, rather than some scuzzy DFM arrangement.

    One thing that the “Deposit SIPP” offers, especially over the short term, is Peace.

    A “parking lot” for the CETV so that the much more difficult “the risks are now on your desk, mate” decisions can be taught at the member’s leisure.

    Ah, but no-one can charge 0.75%-1.00% per annum advisory fee for cash now, can they?

    As I said, just my tuppence worth.


  6. Mark Meldon says:

    And another thing! As Bryn says above, the CETV “Bonanza” will hit the buffers as soon as the recent stellar investment returns (well, mostly) evaporate as Central Banks continue to withdraw the QE punch bowl from the table. We all know that a rising tide lifts all boats, but it truly worries me that nearly all of those I have dealt with in connection with CETVs over the last few years have very little true understanding of what they are/have been getting into.

    With CETVs of 40 time the deferred pension knocking about (QE again) human nature does mean that some get dollar signs in their eyes and lose the plot about boring things like being old and frail. Sure, it CAN be right to take a DB transfer into a private arrangement, but not very often and rarely if that is the only investment fund the member has. Most people I have advised of late have a mixture of invested wealth, including, quite often, a sizable DC pension fund too. In that case, why bother taking on board the extra DC risk by folding a DB CETV into the markets? Unless “something special” is going on, I guess most DB members would be proven to be very wise, with our old friend hindsight, in the long run.

    We all know that DC pensions have often been a disappointment what with poor investment returns, high charges and complexity – with honourable exceptions, of course.

    Whatever happened to the good old “Section 32” policy, too?

    And annuities!

    Hey, ho.

  7. AndyK says:

    As usual Henry, you raise many valid points here. If the adviser that claimed the Governed Portfolio has generated 10% pa returns for the last 10 years didn’t put any context around that ‘fact’ (incorrect as it is), then that’s appalling. There are 9 Governed Portfolios and in general they have performed well (only the two highest risk ones have generated c.10% pa), but over the nearly 9 years since their inception, we have been in a long bull run. Royal London’s claim is that the portfolios are designed to minimise the downside in market downturns, but as yet this has not been tested in a persistent downturn.

    Clearly you are able to neither promote nor denigrate any individual provider’s products within your blog, so it’s not your job to publish Royal London’s charges. However, I would like to challenge the figures stated. You don’t need a great deal in your pension pot to be able to access the Governed Portfolios at an ongoing cost of 0.5%. The gentleman with a £590K pot could pay just 0.4% to RL. I’d also say that a 1% ongoing Adviser Charge is a bit ‘toppy’, but I can understand why you would err towards the higher end of the scale for the purposes of your blog.
    Please note that I’m not linked to RL in any way, but I am happy to recommend them when their charges can be shown to be the lowest.

    • Mark Meldon says:

      This is true; I regularly recommend the RL product as “it does what it says on the tin” for a very reasonable cost. Great admin, too. SIPPs are for those who wish to be more “engaged” with their long-term fund, IMHO, and generally don’t offer things like “Lifestyle Switching” programmes (for good or ill) as RL do.

  8. Iain PW says:

    I think anyone advertsing on here any pension provider’s ‘product’ or funds or charges is making a grave error that could well come back to haunt them unless this blog gets deleted. Surely, if a tranfer was in a BSPS member’s interests, if the required return in drawdown is say 5.5% per annum including inflation then you look to build that proposition as well as issuing client with your Top 10 Drawdown Guidlines (to make the money last including 2 years’ cash in emergency fund, Guardrails, no increased to income in a year fund down, targetting fixed interest for income in a Baer market etc). This assumes all of this has been tested in a deatiled cashflow model (aware of their limits) and on a piece of software like Timeline that in part allows for sequential risk.
    Using Stakeholder pensions and PPPs and GPPs kills off flexi access drawdown including dependant’s drawdown and other flexibility.
    Suggesting there are dunds that give you most of the ups and no downs fails to recognise you cannot dampen equit volatitilty without killing the returns (see under with profits and absolute return funds).
    None of this is advice. BSPS members – caveat emptor!

    • Iain PW says:

      excuse the typos!!!!

      • AndyK says:

        Just to clarify Iain, my intention was not to advertise, I was simply challenging the charge level indicated. Whilst I am certainly interested in the DB to DC transfer debate, I do not have the requisite permissions to conduct DB transfers, so I have no interest in enticing BSPS members to transfer out.

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