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than that, may be because a number of applications will be disqualified because the firm certifying the advice, has withdrawn from the market.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.
The October poll on BSPS Facebook that led me to Port Talbot
What a sad state of affairs when confidence in
” an income for life” is damaged so much by the deal with Tata to abandon its obligations
This had nothing to do with IFA’s.
The next pension mess is coming at a predictable rate with auto-enrolment see the clip below let’s see how they blame the IFA for this one!!
“The increase in total contributions from 2% to 5% next month and from 5% to 8% in April 2019 will see a surge in pension costs as a proportion of disposable income, especially if employers only contribute at the minimum rates required.
The analysis by the Finance and Technology Research Centre (F&TRC) found that an employee with the average UK annual salary of £27,782 and with the average UK disposable income of £326 per month would see contributions surge from 4% of disposable income to 13% next month. In April 2019, this would then increase to 21%, the research company said in its Making Savings Affordable report.”
I cannot agree that this had nothing to do with IFAs – they were the central players. I might agree that IFAs have simply been acting on Government instructions.
I think you missed my point The IFA community was not complicit in the deal to abandon the promised benefits. That was the combination of political expediency and accounting treatment designed to prop up the Gilt market
This is what destroyed the trust in DB leaving the member vulnerable to a sale talk.
The bottom-feeding parasites who give the professional adviser a bad name no one is defending. However, if I suggest that you are like Maxwell or Green I think you would be justifiably insulted as I find the generalizations on the IFA insulting
My view is that in the BSPS case, IFAs were not the primary culprits. Yes, there were bad IFA firms out there, and some advice I saw was shocking.
The scheme failed to pay the benefits it promised. When that happened the trust was lost and from there on everything went down hill.
What happened afterwards was human nature, CETVs were double the house value in those areas, working conditions were hard and retirement early was on everyones mind. It is hard to fight these biases.
I think that if the scheme looked to offer a bridging pension to State pension by some pension exchange mechanism, without increasing its overall liabilities we would have stand a chance to keep 60% of those people transferring into the DB scheme.
If there is a lesson from this is that we need to think for different solutions next time. I am not a fan of partial transfers, but some pension exchange mechanism could be put in place to pay an early retirement pension till SPA, followed for a smaller pension afterwards. We need to bring flexibility to the Defined benefit pensions too!
Retirement have changed. People like to semi-retire and do a bit of work. Death benefits are another issue too, it is not fair for blue collars to sponsor those with white collars either. I think a bit of flexibility is needed for DB schemes.
I think we need to stop blaiming IFAs and instead helping them and educate them. If PI insurers walk away from this market then the Section 48 from the Act may dissapear and everyone would do whatever he thinks is good without advice.
I think IFAs stopped around 2,000 BSPS to transfer, which I think it was a very good outcome. We may have got it wrong with approx. 2,000 too. That could cost us up to £100 million in compensation through the FSCS, £50k per mistake.
I agree Eugen. I saw a chap two weeks ago witha deferred pension worth £900k who is adament he wants to transfer, his logic is sound and if he wishes to I weill be arranging for him to speak to a DB Tf specialist, but I really think the best option would be a partial DB transfer, but they are as rare as rocking horse **it I believe.
Henry for someone who invariably makes a lot of sense, it appears you need to be reminded that Tied/IFA no longer exists, but there remain two types of adviser. Restricted and Independant and whist there is nothing wrong with either party, it is totally unfair to blame it all on IFAs. Especially as ironically many Pension Transfer specialists are restricted in that the ONLY advise on DB transfers while many IFAs (me included) neither have pension tf qualifications/permissions and in more than the 20 years I’ve been doing this job I could count on one hand the number of DB transfers which afetr referral to a DB specialist HAVE been advsied to transfer.
Well no more insulting than attacks on actuaries, footballers and estate agents. There are good advisers John, you know I think you one, but I cannot write a blog which ring fences you and Al and others. I know your views.
I give it 2 years before we start to see demands for compensation for miss selling, any one for a cup of “deja vu”?
I am truly saddened by the reputations damage inflicted on the true IFA community who I believe would have advised clients correctly whereas the bottom feeding parasites correctly described above who transferred BSPS members with no process/ no suitability reports and drove funds down UCIS/ contingent charged contracts should be in jail and not allowed to inflict this damage on both parties ever again. This is a shocking travesty which our regulators must accept some responsibility over.
The really odd thing about DB to DC transfers is that much of the furore, quite rightly so, over the BSPS debacle is perhaps anachronistic and reflects a pension situation that I very rarely come across nowadays. Amongst my 250 or so ‘active’ clients, only one has been with the same employer throughout his career. This chap, however, is still representative of nearly all individuals I meet in that he had a DB scheme that was closed to future accrual some years ago and is now a member of a quite reasonable DC scheme.
I think that the vast majority of long-standing clients of IFA’s will have this mixture of DB and DC occupational (or personal) pensions – unless my client ‘pool’ is unrepresentative.
Just yesterday, a couple came to see me and the husband has two excellent deferred DB pensions that will be taken as full pension (i.e. no PCLS) from August this year, about £130,000 in a DC scheme and a further £250,000 in a SIPP that I arranged a while ago. We look at the DB schemes in great detail a year or two back and ‘ignored’ the £600,000+ CETV’s as we agreed that he had a most attractive combination of pension types (state pension to come, too), with the DB schemes giving him his guaranteed income for life and the DC ‘pot’ of £380,000 offering him flexi-access as and when he needs it.
Clearly, if you only have a DB (+ state) pension to rely on – which is a nice problem to have – then only a tiny percentage of members would likely be well-advised to transfer for very ‘special’ reasons. But if you have this ‘blend’ of pensions the argument in favour of taking the transfer is much weaker, I think, unless something unusual is going on. Nor must we forget spouse’s pensions, either.
Anecdotally, those taking transfers from the bank schemes are senior personnel with very large CETVs and not many customer-facing staff.
The era of patrician pension provision is nearly over, but it’s fund advising those client’s with ‘blended’ pension funds – who are unlikely to ‘need’ to abandon what DB pension they have. This applies to millions who have S32A ‘buy-out’ policies, too, and these have been ‘forgotten’ in all of the noise, methinks. Lots of life offices are deeply underwater with their GMP liabilities!
Hey, ho.
You’re not untypical Mark, I have many clients with the same mixture of prserved DB and currently accruing DC. The secutiry of the DB scheme being kept allows for (greater) risk taking with the DC scheme and greater flexibility, but ONLY with a proportion of their monies. They don’t need 100% flexibility, just some flexibility which someone who worked 40 years with the same employer in a DB scheme doesn’t have unless they aree offered partial DB transfer.
“The wings of the BSPS2 Chief Investment Officer Hugh Smart will be further clipped as he is now managing out a pool of pensioners with a much reduced constituency of youngsters and the capacity to invest for growth is severely diminished. The shift of nearly 8,000 deferred members away from BSPS2 will make the scheme stronger but less likely to deliver discretionary increases in future.”
I hope this doesn’t have any impact on the extra money that BSPS2 might give to members i.e.
1. When the shares that the Trustee of the new scheme will hold in TATA Steel UK Ltd are sold, or dividends are received from those shares and this is enough to pay the extra benefits. The Trustee of the new scheme would decide which members would get a payment. Only members who built up some benefits before 6th April 1997 could be considered. The Trustee could pay a lump sum or promise a future lump sum or pay extra pension.
2. If the funding level on a buyout basis reaches at least 103%. This is a measure of the cost of purchasing annuity policies for all members with an insurer which would replace member’s pensions. The Trustee would decide which members would get an extra payment. All members could be considered.
3. If the outcome of the 31st March 2021 actuarial valuation is better than expected and no payment has been made under point 2 above. Pensioners who built up some of their benefits before 6th April 1997 could get this payment. The payment could be a lump sum or extra pension.
Interesting points Robert
Your 82.6% is the damning static, Henry. tPR stopped their role short, with a prissy comment about “not recommending transfers out”. Do they think ordinary pension scheme members hang on the tPR’s slightest pronouncement? The FCA were then embarrassed, with their Director of Supervision unable to answer obvious questions asked by the Select Committee.
82.6% of members who could transfer would be expected to jump into that enormous gap between two regulators. No-one thought to ask “What do we think will actually happen”
Blame chicken and chips lunches!