The diverse agenda of the DWP Select Committee might be considered madness. I am not going to write that their is method in this madness as it’s clear to me that we cannot properly consider freedoms, without looking at CDC for those with pots but no pensions.
I also want to get on the right side of this Committee as I am due to give oral evidence to them in a few days time. I have only once been done a genuine favour by a Minister and that was by Frank Field who gave me a lift back to the Oxford Park and Ride after a lecture in town. Frank Field is regularly thought mad twenty years have passed since that lecture and I still see a kind and generous soul who understands the financial behaviour of ordinary people better than most.
So to have the chance to answer questions about what Al and I saw in Port Talbot and the interactions we’ve had on the Facebook pages will be an honour and a pleasure.
We’ve called a special session looking at the advice and information being given to members of the British Steel Pension Scheme about their #pensions and transfer options https://t.co/S8otwM8qD0
— Work & Pensions Ctte (@CommonsWorkPen) November 30, 2017
The special session is informing the inquiry into the operation of pension freedoms.
The Committee is due to produce the first report of this inquiry in the next weeks: this evidence session is intended to inform a second report that will propose regulatory and other measures to prevent similar situations.
It is not for me to propose those measures but I notice that on the list of inquiries currently being carried out by Field and his team is one on collective defined contribution schemes.
Chive – a good interim solution
I hope that the link between the current madness in Port Talbot and other steel towns needs not be repeated.
Al Rush has embared on Chive, yesterday he was doing work with steelworkers who are flocking to him and his team of unpaid IFAs, unravelling the misconceptions of BSPS members. I understand that the BBC will be reporting on this on the 6 and 10 o’clock news.
If you are a member and you are reading this, then you can book yourself a session in one of the many locations Chive is operating in – using this link.
Some IFAs have been rather less than generous to Al and this charming note – captured by Dave Trenner – explains why Chive – as applied to the emergency at BSPS, is not a measure to “prevent similar situations”.
But Chive, relying as it does on a self-moderating group of highly qualified Pension Transfer Specialists, is a resource that other employers and schemes will be able to call upon when other groups come to their “Time to Choose”.
Chive will need to operate on a commercial basis in future but for now , I’m sure all but the hardest hearted will agree with these sentiments.
From @RAF_IFA and @henryhtapper going to Port Talbot to meet BSPS members to @JosephineCumbo getting stuck in for the FT and local IFAs now volunteering their time, this saga has exposed the good that still exists in financial services https://t.co/7T0XQxzmvJ
— Tom Selby (@thomasselby) December 4, 2017
More radical long-term solutions needed.
To my mind , there is no obvious solution arising from the FCA’s retirement outcomes review. The retail sector has failed to come up with a mass market solution to give ordinary people , faced with pension freedom , a guided pathway.
Although it will take two years to create the regulatory framework, CDC could still deliver, by the beginning of the next decade, a default solution for those -like Al and others are speaking with – who are looking for a wage in later life without the backing of a sponsor.
In the short-term, the demand for such a service will be as much from those with money emerging from DB as from money accumulated in DC. The wall of pension wealth moving inexorably towards later-life , demands the Select Committee’s attention and I’m very glad it is getting it.
Method in its madness.
So the seeming madness of running concurrently an enquiry into pension freedoms and an enquiry into CDC makes sense to me. One is the solution to the other, CDC will be born out of frustration with pension freedoms but CDC is also the expression of pension freedoms for those who want a wage for life but do not want to be tied to the tyranny of annuity rates.
Which is why you will see a lot more articles like that from Con Keating this morning – on this blog. And why I am confident that the remedial work Al is doing in the steel towns needs the publicity it will get from the DWP Select Committee’s ongoing scrutiny.
I am not supposing that achieving a short-term fix to the problems created by the decline of DB will be easy, CDC is no silver bullet; nor am I suggesting that the proper organisation of advisory report is a long term fix for retirement outcomes, it is only a sticking plaster. But I do think that the DWP select committee hold the keys and that with the stewardship of Frank Field, will be able to take matters forward.
That is my hope. It is probably pension’s best hope – right now.
Whilst the motives of you and Al are beyond question I read Al’s submission to the committee and am very concerned that the conclusions he has drawn may be given greater credence than they merit intellectually as a result of his selfless work. There is no easy solution to this, but it does appear that you have drawn conclusions from your work based on direct conversations with 7 people. Whether or not your views on contingent charging, SIPPs, guidance, use of DC occupational pensions are right or wrong, I hope that you and Al will not try to adopt the stance that you speak for the industry. And I hope that you will highlight problems and issues rather than give solutions. You are both very good people, but I fear that the solutions proposed are not based upon well considered facts, but more on beliefs and values. If for example you get rid of contingent charging fully there will be a need for a much higher charge to be made for those who do not transfer but still take advice. And if that is the case then the members concerned will need to be able to pay this charge from their own pockets under the current regime. So to end contingent charging without also introducing the ability to pay for advice from the DB scheme will actually reduce access to advice. And if you remove contingent charging altogether then how can you set a non contingent charge that will fully cover the PI implications of those transfers which do proceed without setting a much higher charge for DB transfer advice. If you set a fee for advice that is not contingent upon a transfer proceeding and which is the same fee regardless of the transfer proceeding or not then this could end up being a very high fee. If the current regime exists then many people will not receive advice because they would worry about how to pay the fee if there is NO transfer. If there is to be a non contingent advice fee who will set that fee? The Government? tPR? the Trustees? And if the fee is insufficient to attract sufficient advisers to transact that fee what advice will people then get? For all those people who do not need or want advice this would help avoid a lot of the scamming bastards who prey on BSPS members and the like, but for those who would benefit by transferring this could stop them ever knowing that they would be better off transferring. One possible solution if there is to be a non contingent fee is that advice costs could be paid in three ways: i) by the member directly if they prefer ii) by the scheme trustees if they are generous and able to or iii) from the members defined benefit by way of an actuarial reduction in their defined benefits. The fee would be set by the market, and the member could then potentially hold a beauty parade to identify the IFA they would most prefer to work for them. They could choose either higher fees or better service. If instead the fee is set by the Pensions Regulator or The Government that’s fine but you may well find that it will be too low to attract sufficient numbers of G60/AF3 qualified advisers to provide the advice. Even when the quality advisers are there to advise there is a need for trustees to produce better information quicker for both members and advisers advising them. There is a need for better efficiency of trustees replying to requests for information which is crucial to produce accurate TVAS reports. There is a need to understand that critical yield is only one part of the decision (to be fair the FCA acknowledge this fully), there is a need for less numerical information to be given to members, there is a need for less key features and a more simplified presentation of the factors relating to advice for a complex decision. Unfortunately the way regulation is currently set up is to create all manner of paperwork and reports to be provided, and this greatly increases the time taken to provide and present advice to clients and therefore increases the costs of good advice. The area of DB transfers is such a crucial and irrevocable decision that members need access to ethical, professional, high quality communicators. They need personalised advice relating specifically to their own circumstances, needs, values, beliefs and life goals. There is also a need to consider the possibility of statutory partial transfers. Whilst this is already legal, the vast majority of scheme trustees will not offer partial transfers out. They cite the complexity of calculating fair values, but this is tosh, since they have to do it for pension sharing on divorce. Actuaries need to be better at providing valuations to trustees, and to charge a lot less than they do when much of the work is done by a computer. Pension freedoms do have their merits in a large number of cases (not a majority of cases but still a sizeable minority), but in every case where there is no option for partial transfers (i.e. almost every case) it becomes a binary decision. All out or all in. This is rarely optimal. The member has to choose to plant both feet one side of the line when a more balanced solution could be to retain the benefits which are needed to finance essential outgoings in retirement and then a partial transfer out of the remaining funds to provide other less essential income and to be used more flexibly. It may be that the member could have an option for one CETV per year, which could include a partial transfer option as well. If all members knew this option were available they could then consult an IFA in advance (most of us offer free initial consultations) to do some basic work on identifying their essential outgoings and the member could then ask for a partial transfer where they retain a set amount of their benefits. These might be unworkable and impracticable ideas, so someone else could have much better ideas than me, but I think there is currently a lot wrong with how members are left to their own devices to read reams of brochures, pamphlets and online FAQs which give guidance only. And in regard to abolishing contingent fees I actually think that whatever you do with initial fees, there will always be contingent fees. They are called ongoing advice fees. And so it really is down to the ethics of the IFA. There will always be workrounds for non-ethical advisers to screw clients. I believe that without the changes I suggest, there has to be some element of contingent charging for four main reasons, for all or most of which I accept there is a compelling counter-argument:-
i) psychologically people will not pay a non-contingent fee out of their own pocket unless it is a very low charge. If the non-contingent charge is very low you simply will not get advisers offering their services.
II) there is more work to arrange a transfer so the IFA will need to charge for this or else the non-contingent charge for all will need to be higher to take into account this extra work for the few who do transfer.
iii) there is a PI cost for this advice, so this needs to be funded by those transferring and
iv) IFAs know how to recommend not just appropriate risk based solutions but also to provide the ongoing financial coaching and guidance to reduce the risks of transferred pots expiring before the member and the risk of spending too little.
CDC may or may not be right for some transferred pots, but right now it does not exist, and even if and when it does it may not be right for the member not requiring income.
I wish you both the best of luck in your time with the Committee.
Speaking for a firm that does advise on transfers, I have to say almost everything about the BSPS situation is alarming for the reputation of experts. How, btw, did we get to a position where there was no bulk transfer option, put out to tender with appropriate cost and quality controls? A mass shark attack was the predictable response to fractionalising the opportunity. Unfortunately, even good advisers may be indistinguishable from a shark to the untrained eye. And as Brian rightly and gently points out, even self-appointed experts trying to prevent bad outcomes may actually contribute to them. I have a suggestion that may help.
Even at this late stage it would not be difficult to organise an expert triage process that would at least make the principles clear, illustrate the sensitivities and give rough orders of magnitude. The point of a triage process is to cut out unnecessary advice costs by demonstrating a prima facie (and unbiased) case for transferring. For instance, we have a stylised version of our full stochastic modelling that could be accessed online by either well-meaning but non-PTS ‘advisers’ or by members directly. The key input is a CETV and the key output is sustainable real spending based on the risk level, with risk a function of both the distribution of probable spending outcomes and short-term portfolio variability. For investors not used to exposure to stock market risk, volatility is likely to be the critical ‘reality test’, even if outcomes are heavily skewed in favour of transfer. The returns and risks are horizon specific (because it’s essentially a drawdown tool) and the whole-plan probabilities are realistic (with a stochastic process for derisking built in) and costed (albeit at 1% all-in ongoing which is more dolphin than shark; initial charges would need to be knocked off the CETV). Applied to BSPS, one weakness of a stylised triage model is that it may not deal adequately with the complexities of the inflation risk which looks like a material feature of both the PPF and the alternative scheme. That requires full regulated advice.
I’m not sure the membership of BSPS would (in other respects than the calculated purchasing-power gain) be targets for our integrated transfer and discretionary management service and you won’t find us circling Port Talbot; but if the triage tool helps protect BSPS members from both sharks and clumsy dolphins, we’re happy to see it used. It’s a lot more useful than a free chicken in a basket.
If interested, please call Fowler Drew on 020 7736 2434 and ask for me or David Anderson.
Henry ,
I heard you on You and Yours, Radio 4 14.12.17 say the Pension Protection Fund ( PPF) is not bad.
It is better than nothing, but listeners may not appreciate how bad it is from your comments.
I paid for a company pension with AEA Technology that was fully inflation proofed at RPI. I spent a lot of my salary buying this product. AEA Technology was manoeuvred into a pre-pack administration in 2012 and the pension scheme was dumped into the PPF.
Deferred pensioners lose 10% of their pension on entry to the PPF. Inflation protection is capped at 2.5% per year in the PPF, no matter how high inflation rises, so everyone in the PPF is getting poorer with present inflation at 3.1% CPI.
Even worse is the iniquitous PPF rule that pension contributions made before 1997 have no inflation protection in the PPF. This means that older pensioners can lose all of their inflation protection. This causes a continuous cumulative loss of retirement income purchasing power. The PPF is more of a Pension Destruction Fund in practice. The exact opposite of what 3000 AEA Technology pensioners paid for in full, in good faith.
AEA pensioners have been fighting intransigent Government departments since 2012 to try and force them to honour the assurances that our pensions would not be affected by the privatisation that they forced on AEA Technology.
An elderly colleague said to me ‘Are the Government waiting for me to die to solve this problem? I did not have the heart to tell him that this is exactly what they are doing.
Please use any further radio appearances to highlight the total injustice of how the PPF treats older pensioners.
Tony Reading
AEAT Pension Action Campaign
14.12.17
Tony, I said that the PPF is not bad because there are steelworkers who remember Allied Steel and Wire – that was bad and its pensioners got diddly squat. I don’t want to frighten anybody about the PPF – but I’d prefer people who have the offer – to take BSPS – unless they are in a very special situation (typically spouses of those with special pension rights). The people who are in a special situation should know who they are. For the rest, the PPF is second best not second worst.
As regards AEAT, i sympathise with your loss, without having the knowledge or time to do much more,