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)
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.
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