The full impact of transfers on the British Steel Pension Scheme has been revealed in this perfunctory tweet
The British Steel Pension Scheme has paid just over £1.5bn from around 4000 DB transfers to date. Around 3700 transfers still to be processed.
— Josephine Cumbo (@JosephineCumbo) March 12, 2018
I have since had it confirmed from the Trustee that it now expects the final amount taken via Cash Equivalent Transfer Values from the scheme to be “over £2.5bn”.
My estimates have been that £3bn has been requested to transfer, that it may be less than that, may be because a number of applications will be disqualified because the firm certifying the advice, has withdrawn from the market. Yesterday, the FCA confirmed that the number of firms who have voluntarily de-authorised themselves has risen to ten.
Technical note ; the CETVs at BSPS are (as a multiple of salary) relatively low – typically 25 times pension. This is because of a relatively high discount rate resulting from the high allocation of the scheme to growth assets and the 5% clip on CETVs resulting from the insufficiency report issued by actuaries WTW.
As a proportion of total scheme assets, the amount transferred out is around 25%, as a proportion of deferred members assets – it is probably double that. Transfers taken have been from those with longest service and with most to transfer. This either suggests a degree of cherry picking among those advising, or that there is a preciously undisclosed class of BSPS employee – who might be deemed “wealthy”.
What does this mean for the 3,700 BSPS members who’ve yet to have their CETVs paid.
At least we now know that all those who got the correct papers in – will have their transfers paid – though I fear there are many who will find out too late that there was an error in their paperwork.
BSPS has 3700 pension transfer requests pending.
“Members switching to new scheme who submitted all necessary paperwork on or before 16 Feb will have their transfer paid on the basis of the value quoted. This will be the case even if the transfer is not paid until after 28 March”
— Josephine Cumbo (@JosephineCumbo) March 12, 2018
What does this mean for BSPS 2 (New BSPS)?
It will mean that up to 7,500 of the projected membership of BSPS2 will never join. Some of those may not have made an election under Time to Choose and some may have “chosen” PPF, but most of the transferees will have otherwise have headed for the new scheme.
Since the Trustee, by his own admission, totally underestimated the size of the transfer, it is likely to be a different BSPS2 than had been imagined, one with fewer deferred pensioners and less assets. Paradoxically, the financial resilience of BSPS2 may have been strengthened by these transfers as the “buffer” put in place as part of the Regulatory Apportionment Agreement, is not impacted by transfers out – it is only reduced by those falling into PPF. If the scheme is stronger, it is also likely to be less ambitious. The wings of CIO, Hugh Smart will be further clipped as he is now managing out a pool of pensioners with a much reduced constituency of youngsters. The capacity to invest for growth is severely diminished.
In summary, the shift of nearly 8,000 deferred away from BSPS2 will make the scheme stronger but less likely to deliver discretionary increases in future. This make for a different BSPS2 – not necessarily a worse one.
What does it mean for UK financial services?
BSPS is by no means the scheme with the biggest CETV bill. Barclays’ accounts it shed £4.2bn in 2017, Lloyds Banking Group reckon they are losing c£250m a month, British Airways talk of £75m a month.
The ONS MQ5 Data for Quarter 1 2017 onwards remain provisional and subject to revision until the incorporation of the 2017 annual survey results in December 2018.
So we will not know – till later this year the full extent of the voluntary shift from DB pension members , from collective pensions to individual arrangements. But there are enough schemes reporting more than 10% of relevant assets transferring to suggest that 2017 has been a game changer.
While the occupational schemes shed assets, the insurers and SIPP providers report record years. Old Mutual reported this week a 40% increase in profits with over 20% of all inflows last year from DB transfers. Similar numbers are reported from the Prudential (with exponential growth in Prufund) and St James Place. The insurers and the SIPP platforms have simply held forth their aprons.
What does this mean for Government policy?
The libertarians will argue that this is the greatest thing to happen for freedom and choice since the French Revolution. Others will be more cautious.
53% of Transfers investigated by the FCA last year were considered questionable or worse. That’s around £1.5bn of BSPS money and over £2bn of Barclays money.
The Personal Finance Society has claimed that many people who would have had the option of freedom and choice will have their dreams broken by Professional Indemnity Insurers unwilling to insure some advisers to do more of the same. This claim was reported in the FT.
It is unsurprising that PI insurers are nervous about insuring a market where 53% of the cases investigated by the FCA are deemed unsafe. PI insurers have long memories!
And it was disingenuous of the PFS to suggest that the intention of the Treasury, in introducing Pension Freedoms was to increase the numbers of people transferring out of DB schemes.
Below is an excerpt from the Treasury’s impact study , published in 2014.
What this wholesale charge to freedom means is that the intentions of the legislation laid down in PA2015, have been reversed. Pension Transfers have soared since the introduction of the Pension Freedoms.
This is a major embarrassment to the Treasury, not least because the pension fund trustees, mentioned above, appear to have had no power at all to “help mitigate risks to DB pension schemes from an increase in demands for transfers”. It is only now that the FCA is recognising there is a problem. One of the lessons of Port Talbot is that neither Regulators, nor the Trustee were alive to what was happening under their very noses. They were – to use Frank Field’s phrase “in another country”.
The Treasury are an unwitting accomplice to this carnage
For all the fine words of its 2014 statement, the Treasury have unwittingly encouraged IFAs to milk defined benefit schemes. They have done this by condoning conditional fees which allow ordinary people “free advice” or at least advice paid for out of the transferred funds in such a way as they never have to dip into their pockets. The cost of this advice to the public purse is that it is paid for from a tax exempt pension fund and paid under the “intermediation” rules, without VAT.
The Treasury is aiding and abetting the very thing it claimed it would prevent. It’s principal enforcement agency, the FCA – seems powerless to do anything about it.
If you want to read more about this scandal, follow this thread.
Some sorry conclusions
- Transfer levels were at an all time high in 2017 with some schemes seeing over 10% of available assets transferring
- This has been a bonanza for advisers, SIPP providers and insurers.
- If the FCA sampling is correct, more than half of this money should not have moved
- The only thing that appears able to stop the flow is the refusal of PI insurers to insure advisers to continue
- The Treasury impact statement has proven hopeless – pension freedoms are now claimed by the FCA to be about allowing this carnage to continue
- The Treasury are aiding and abetting all this by permitting conditional fees to be used as a means of paying for advice.