By George, I just shrunk the pension!

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While “workplace pensions” go from strength to strength in terms of coverage, the amount of money being paid as “pensions”, certainly in the private sector, is likely to shrink. this article looks at why and asks some awkward questions about the long term consequences to ordinary people when they lose their “wage for life”.


The Office of National Statistics publish a document known as MQ5 which contains a spreadsheet – famous to actuaries – table 4.2 (Pictured below)ONS funds

It contains regularly updated data on the state of UK pensions and is studied with the intensity of astronomers peering at the milky way.

The latest update- keenly awaited- contained the 2017 numbers; the stand-out number is a jump in transfers out of defined benefit pensions into personal pension “pots” from £12bn in 2016 to £34bn in 2017. This is the actuarial equivalent to finding a “black-hole” on your galactic doorstep.

The £34bn in voluntary transfers is not only three times the 2016 level, it is three times the amount involved in insurance buy-outs – the accepted medium by which trustees get rid of their liabilities or (more politely) “de-risk” their scheme.

The unseemly rush to the door is proving an embarrassment to all parties; the Pensions Regulator is consulting with the FCA, the FCA is consulting with the public. This was definitely not in the Treasury forecasts , published in the wake of the 2014 budget announcement.

Treasury DB transfers

From Treasury impact assessment of Pension Freedoms -2014


The stable door is open and meanwhile wealth managers are leading out the horses with the cheerful message “buy now while stocks last”.

There is a real threat that the bonanza will not last; the FCA’s consultation is into whether contingent charging should be banned. Were it to be banned, the current ability of advisers to charge fees “contingent” on the transfer going ahead, has enabled payments of tens of thousands of pounds from tax-exempt pension pots – VAT exempt.

Many pension experts consider that it is contingent pricing – a practice that has come to the fore in the past two years, which has led to the astonishing increase in transfers.

But the stable door will be shut too late for billions more to have transferred and this is now a genuine issue for those in reward. For so long as this money was destined to pay pensions, it was “deferred pay”, with the money in “wealth”, the link with reward is broken.

As steelworkers in Port Talbot discovered, the arrival of six figure sums into accounts of those over 55, gives people the confidence to retire immediately. Many advisers complain that the transfer values, high as they seem, are inadequate to support early retirement but the lure not just of pension freedom, but freedom from the blast furnaces, has proved compelling.

Included in the £34bn – identified by the ONS will be £4.2bn from the Barclays staff pension scheme, £3bn from the Lloyds Banking Group Pension Scheme and close to £3bn from the British Steel pension scheme. These huge sums will never be paid by pensioner payroll, they will be drawn down from self-invested personal pensions or cashed out to buy anything from home improvements to Lamborghinis.

While former pension minister – Steve Webb – may continue to argue that people are quite entitled to swap their pension for a sports car, those in reward may feel differently. The traditional point of running a pension scheme was to ensure that long serving employees can move from employment to retirement and be paid a wage for life.

Instead, some communities, Port Talbot among them, are now swamped with pension wealth which may last as long as a lottery win. The implications for the communities are worrying as is the impact on the workplaces. While one generation of workers are enjoying a windfall from a defined benefit pension, another is struggling to accumulate money in a workplace plan.

If reward strategies are to be deemed fair, there will have to be a remarkable recalibration of pension policies. For many of the children of those retiring today will be seeing their pension pots accumulate at the auto-enrolment rates.

And it is only a matter of time before some of these transfers are spent and former workers find themselves looking for work again, as they discover that they are rather more healthy than they’d ever expected to have been.

All of which leads us back to the orderly dispersion of money through a pensioner payroll. The idea of a stream of payments that last as long as you do, is deeply unfashionable at the moment. However, we may look back at the transfer frenzy of 2017 and 2018 as a time of great loss.

The discipline of paying and receiving a pension, relative to the drawdown of a capital sum, is something that it is easy to dispense but very hard to return to. Let’s hope that we learn that lesson before there is nothing much left in ours great private pension schemes – to pay out

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to By George, I just shrunk the pension!

  1. Mark Meldon says:

    Earlier this week, I took a call from a lady who will soon be in receipt of a Pension Sharing Order from her soon to be ex-husbands High Street Bank Scheme. She did not appreciate, at first, that this didn’t mean that she would receive a pension but, rather, a tax-advantaged investment account through a PPP or SIPP and therefore take on the risk and expense of the same. This is a common reaction in my experience. Whilst an annuity could be purchased, the CETV ‘on the table’ has no chance, at all, of providing her with anything other than a small income, especially if cost of living adjustments are built in. Her first idea of sweeping some capital out of the PPP to help purchase a superior property has been destroyed.

    She went on to tell me that a close relative also took his CETV from a High Street Bank Scheme into a SIPP (with ‘advice’ from a firm that I can’t find on the FCA Register), cashed it in and bought an Aston Martin – so it’s true, people do suffer from ‘things’ madness! I always thought that this was an urban myth. I have no reason to disbelieve her.

    The lady in question has got the point that she will likely live into her late 80s and needs INCOME in order to survive. A very significant rethink on her part will be required.

    I suppose the only true way to convert your PPP/SIPP into a ‘pension’ is still through an annuity and I have placed 4 new annuity cases in the last few weeks; these are the first since last October and I have several other annuity enquiries underway – I wonder if other IFAs have seen a similar uptick in enquiries? All 4 clients asked for an annuity, which was refreshing.

    I also wonder if some kind of ‘correction’ is due in the markets, as I just have that uneasy feeling like its 2007/08 again in slow motion. Then we will see if the unadvised moths around the FAD candle get their wings burnt!

  2. Con Keating says:

    One minor correction – the ONS publication is MQ5, not the blog’s MP5

  3. Dave Thompson says:

    Mark, Good to read your response, if some of the BSPS members were offered a guaranteed income for life , some would opt for it. Not many advisers recommended annuities even though you can now secure 30 yr term so clients can secure a 150% return of purchase price to beneficiaries . The main reason given is that ” I will loose my 1% ongoing fee” .
    If providers were able to facilitate an ongoing fee, do you think they would be recommended more?

    • Mark Meldon says:

      Thank you; no, I don’t think that an ongoing fee on annuities is right or ever going to happen. I think it is true that most people who buy annuities believe that they will live forever and have other wealth too, do there is lots to work with and get remunerated appropriately!

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