This article explores the relationship between IFAs and defined” benefit schemes, one that has historically been uneasy. It argues that the polarisation of opinion between IFAs who see pensions as “pots” of wealth, and those who regard them as a “wage for life” has never been stronger. This polarisation is present in politics, demonstrated by the differing view on “pension freedoms” at the DWP and Treasury, and present in Regulation, with polarisation between the FCA and tPR’s approach to these same issues.
This deep divide is philosophically between those who believe is that the management of financial assets should be a matter for the beneficiaries of those assets (the member) and those who think the creation of a lifelong income, a matter for collective endeavour.
And the fault lines created by these polarised positions are clear to see, wherever you look.
They are apparent from the Work and Pension Select Committee’s inquiry into Pension Freedoms, which focussed on the divisions in Port Talbot between BSPS members desperate to liberate the wealth in their pension scheme and the Trustees, who were (until recently) oblivious to the demand for “pension freedom”.
The fault lines were equally apparent in the disputes between Royal Mail and its membership (represented by the CWU) and the current dispute between USS and its members (represented by the UCU). In both cases, the employer believed philosophically that it was doing the right thing by switching from DB to DC accrual, based on evidence that ordinary people value a pot of wealth rather than a wage for life.
Contrarily, members have said no to a DC pot and held out for a wage for life. In the case of Royal Mail’s membership, this will mean an unguaranteed CDC pension and in the case of USS members, a continuation of guaranteed accrual from a DB plan.
An IFA, reading these paragraphs, has every right to be confused. Steel-workers are not normally considered as candidates for wealth management, but with average pots of c£400,000, they proved to be of great interest to a large number of IFAs. Meanwhile, the professors and lecturers who one would imagine financially capable, have gone out on strike , rather than be switched to a DC pension.
The polarisation of opinion cannot be defined on socio-economic lines, nor can it be defined in terms of education. In fact, the pension freedoms seem to be as popular on the streets of Tai Bach as in the City of London.
It now looks likely that once all transfers out of BSPS are completed (some time in April), around £3bn will have moved from “pensions to pots”. This is roughly the same amount that has been transferred out of the Lloyds Bank staff pension scheme and around 75% of the £4.2bn that Barclays have reported moving out of their pension scheme. It was not long ago that KPMG were estimating the total transfers from DB to DC in 2017 would be £6bn. What has happened?
The explosion of transfers that has happened from mid 2016 onwards, cannot be explained by the Pension Freedoms alone, indeed , in its 2014 impact analysis, the Treasury saw no reason for the changes in the tax treatment of DC pensions as having little to no impact on DB to DC pensions.
Nor can it be considered a function of quantitative easing or the shift of DB assets from equities to gilts. While there may have been a marginal shift (major at BSPS), quantitative easing and the trend for DB pensions to “de-risk”, were established well before 2017.
What I believe has happened over the past eighteen months has had everything to do with adviser confidence, especially confidence in the IFA sector. Underpinning this confidence is the rise in world stock- markets which has seen equity-based wealth management solutions deliver fabulous returns to their customers for nearly ten years. There is a sense among many advisers I speak to , of invincibility in market forces and the power of investments in growth assets to deliver better outcomes than can be achieved from DB pensions.
The second factor that has given advisers confidence, is finding a mechanism to unpick the lock on the CETV, without creating disruption to their client’s cash-flows. I mean by this the practice of conditional charging. By putting the bill for advice at the back end of the advisory process, IFAs can achieve a painless transfer to their wealth management solution that enables them to be paid from a tax-exempt fund without concerns over VAT. It enables clients to release their “DB wealth” without reaching for their cheque book and it is a very elegant solution to the problems posed by the requirement of those wishing to transfer an amount above £30,000, to take financial advice.
There is nothing uncompliant about conditional charging and it is now widely used by the majority of Britain’s 2,500 transfer specialists. However, conditional charging is showing signs of stress. Ten firms have now “voluntarily” handed back their permissions to advise on DB transfers , leaving hundreds of clients orphaned from the transfer process and marooned in DB.
A recent article in the Financial Times, saw the Personal Finance Society’s Keith Richards, claim that Professional Indemnity Insurers were jacking up premiums for those remaining PTS’ and denying some cover. The practice of outsourcing pensions advice to specialist Transfer Value Analysts, has come under considerable pressure from the FCA.
All this is evidence of the deep divide between those who see a pension as a “pot of wealth” and those who regard it as a wage for life. Many advisers, such as John Mather, consider the defined benefit system, so broken, that engineering a route out of DB for clients , is the right thing to do. Meanwhile, the FCA insist that from their sampling in 2017, 53% of transfers examined, contained either questionable or wrongful advice.
The Pensions Regulator and the FCA are at last working together to produce a joint pension strategy. In a recent session of the Work and Pensions Committee, its Chair- Frank Field- suggested that advisers and trustees were living in “different countries”. The same criticism has been made of the two regulators.
It remains to be seen where this will all end up, few believe that we have seen the end to the DB transfers. The results of SJP, Old Mutual, Prudential and many other providers, suggest that pension providers are now reliant on the massive flows of assets brought to them by advisers. Many advisers now seem as addicted to conditional charging as they were to commission and the FCA and Pensions Regulator, seem powerless to prevent CETVs becoming business as usual.
As always, the analysis of the issue , post-dates it. The transfer from pensions to pots will go on, till a point where either the available assets within DB schemes have been exhausted, or a proper brake has been put on the transfer process, most likely by a Government with the will to ban conditional charging.
In the meantime. we have to hope that those in charge of this new found wealth, can deliver on their promises.
The only disagreement I have with what you have written is the use of the “IFA” monikor. You should be referring to “FAs” or Financial Advisers as the collective name for both Independant Financial Advisers (IFAs) and Restricted Advisers (RAs).
More transfers arer advised on by RESTRICTED advisers than IFAs as it is common for RA’s to specialise as DB transfer specialists and as the title suggests “restricted” they have a restriction of some kind, whether that be only advising on DB transfers, or being resticted to omne company (the old tied).
Mant “restricted” advisers like SJP will not have DB permissions and will have to refer advice to a colleeague in the same company with DB permissions.
If you check your facts with the FCA (the FS register is useless for this), you will find the cvast majority of directly regulated IFAs dfo NOT have DB transfer permissions and if (like me) they come across a new client who has a preserved DB scheme or an existing client with one whose circumstances change so that reviewing their DB pension again is appropriate, they introduce the client to a totally different firm, which is quite likely to be a restricted firm for the DB advice.
Please DO get the terminology right Henry when referring to a collective of advisers as it does a disservice to people like your friends Al Rush and Eugen who helped with the Steeleworkers problems via Chive.
The IFA unusually gets involved once the DB promise of an income for life is compromised. I would be the first to applaud the success of a DB scheme where the sponsoring company honours its promise.
Usually when advising a member of a well-funded arrangement the conclusion is to remain unless there are individual circumstances that override the self-evident arithmetic such as poor health.
The fiscal drag effect on lifetime allowance combined with the multiple landmines that can destroy fixed protections also influence outcomes.
DB champions have a greater emotional problem to overcome with members who have lost trust given the readiness of authorities to do deals at the expense of members and the experience of so many failed schemes
The IFA more recently has been called in to mop up a mess created by a failing scheme.
I can understand the “lottery winner” mentality of a low paid manual worker when the pension pot is 10 times the value of his house and his life expectancy lower than average making the pot with no return sufficient to fund future benefits. The subsidy by the blue collar workers lower life expectancy is seldom considered in the press.
The bottom feeding few that exploit the situation help no one.
The cynical manipulation of the market who by the introduction of bizarre accounting rules sustains the public debt market and the introduction of retrospective LTA legislation damage confidence at the level of the decision makers who sponsor employer participation
As for those with unfunded promises of tax payer guaranteed index linked golden benefits. Our children will not thank us for ignoring that issue
Keep up the good work Henry but concentrate on the difficult problem of curing the disease not merely alleviating symptoms
Let’s not forget that when an employer switches from a DB to a non-DB arrangement they do so to cut costs and this ultimately means the employees get less. You appear to be making the point that the fact that USS employees have fought against moving to DC is because DB is the best option but in reality it is more likely to be because switching to DC lowers the remuneration package of staff.
Henry,
A very good well balanced article. I don’t agree with all you write but this is very well balanced.
However, I think one issue that seems to have drifted to the back burner is PARTIAL TRANSFERS.
Please could we all continue to put pressure on schemes to offer partial transfer of the DB benefits? If Trustees truly believe in their scheme surely they should offer this, even if the member has to pay a “fee”. In my opinion this would create much better client outcomes.
Steve, “Partial Transfers” are currently available for those over 55. It is worth checking out an article by Andrew Tully. Clients are able to match a wage for life, by purchancing a guaranteed increasing lifetime annuity with some of their transfer value. The remainder is “wealth” . Clients can do this to suit their own personal circumstances. The death benefits can be more compelling than DB. You are able to have your cake and eat it. It needn’t be binary choice between wealth and income for life.
‘Nor can it be considered a function of quantitative easing or the shift of DB assets from equities to gilts.’
Why not? The schism that you say has opened up between belief in personal freedom/responsibility on the one hand and a paternalist tradition on the other cannot explain the growth in transfers. The tightly-prescribed FCA transfer regulations, and the adjudication methods adopted by FOS, mostly embedded in adviser practice via a few widely-used software packages, made it difficult to justify transfers under ‘normal’ market conditions that prevailed before QE and before a larger number of schemes had derisked. Since you have often alluded to the maths at work here, I know you know what they are. I have also explained in countless articles at http://www.fowlerdrew.co.uk, showing the maths, why this combination of necessary conditions explains the change from the DB scheme providing greater utility in most cases to transferring providing greater utility. This applies even when the previous approach to risk in someone’s personal investments took into account the underpinning of a DB pension as part of their retirement funding. This ought not to happen, as essentially you are replacing like for like. It has only happened because of monetary policy intervention in pricing long-duration, real risk-free assets. That doesn’t happen in textbooks and we may yet discover it should never have happened. It also will not last.
You choose to see this as an agency problem: a boom created by agents with a vested interest in recommending transfers. But agents always had that interest, even before market conditions changed, yet it did not lead to a boom in transfers. Though transfer advice capabilities have generally improved, along with technical skills in most areas of investment planning, numbers have not. We have an advice industry that is shaped by paternalism and still somewhat unprepared to meet the demands of a market increasingly looking to exercise personal responsibility.