“Cry havoc and let slip the dogs of war”

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”

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.