When we “de-risk” – where does the risk go?


When you do the washing up, you leave your plates clean, the dirt gets washed down the sink. The same when you change the oil in your car or when you go to the toilet.

What happens is that all the waste flows into sewers and is either recycled or pollutes.

We have got used to the idea that we can flush away our problems because we are confident that we have infrastructure which is coping with the environmental stress we cause by throwing things away.

In financial circles, this is called “de-risking”.

Most of us are familiar with the term “de-risking”. It is (for instance) what a pension scheme does to remain viable. There are many sources of risk in a pension scheme, but when you get rid of one risk, it tends to pop up elsewhere. That’s why the Pensions Regulator talks of an “integrated risk management framework” (IRM).

There is no talk in the IRM of where the risks go – when they are managed out of the framework. The Pensions Regulator has a statutory objective to protect the members, so there is little in the IRM document to suggest that it is the members who are being asked to accept future and present risk.

For IRM to be effective, there must be less aggregate risk in schemes, for that to happen – there must be risk transfer. If has been assumed that risk transfer will occur, but that it will be through insurance companies buying the risk out at the full buy-out cost.

There is one way a pension scheme can get rid of risk for good, and that is to transfer it out. The IRM assumes this is through buy-out – or through the PPF.

But in practice it has typically been  the  member, who takes that risk away for good. So long as the member takes away his or her own risks voluntarily and is properly rewarded, there is no problem with this. The cost of an executed CETV to a scheme (and so to the employer is considerably less than the cost of buying out the benefits.

Schemes really benefit from CETV transfers – at least when a CETV transfer is properly executed. Latest figures from the ONS (see below) suggest that three times as much risk was transferred out of pension schemes last year through CETVs – than through organised buy-out. This has been a rare windfall for the IRM Framework.

There is however a snag.

Last year, the FCA noted that these transfers were not being properly executed, in one sample they reckoned that 53% of the transfers executed were problematic. In another survey this year , they said 30% of the transfers they looked at – shouldn’t have happened.

This week, we learned that the total transferred out of Defined Benefit private pensions was considerably higher than even the ONS’s provisional estimates at the end of 2017.

ONS Q1 2018

ONS MQ5 updated June 21st 2018 (table 4.3)


That’s an almost sevenfold increase since 2014 and £2.5m higher than the previous 2017 numbers.

The amount of de-risking to individuals is even more remarkable when you look at the quarterly breakdowns.

ONS transfers Q1 2018 2

ONS MQ5 updated June 21st 2018 (table 4.3)

Quarterly transfers have risen every quarter since the start of 2016 and in the first quarter of 2018 reached an astonishing £10.62bn -more than four times the 2016 equivalent!


So where has all the dirty water gone?

The dirty water (aka risk) has left the engine/sink/sump/toilet and the risk (good and bad) is now with the members of the pension schemes.

We don’t have accurate data scheme by scheme. I was told by a Government official on Wednesday that 8.500 members of the BSPS scheme had left the scheme, Jo Cumbo reported 7.500-8,000 yesterday and the last time I spoke with BSPS Trustee, the number was around 5,000. Until recently BSPS were reporting the aggregate transfer as up to £2bn, with average transfers over £350,000, we can suppose the amount transferred over £3bn. At least 20% of the membership with transfers chose to transfer and to take on the risks previously managed by BSPS Trustees.

That risk is now with members and is being managed in SIPPs by IFAs. Some may be being spent, but IFS stats would suggest that there is greater risk of hoarding than over-spending. People have taken on the risk not just of how to invest the money, but how to spend it – without spending too much or too little. Which is fine – so long as they know that these risks are for them “good risks”.

John Ralfe has queried the concept of a “good risk”. I would say that you would take the risk of managing your own pension if you had a different plan to consume the transfer than to replicate the CPI pension +spouse, offered by the scheme. If you wanted to spend it faster, or not to spend it al all, then you are in control of the money and can manage the risks yourself. The risk is a “good risk” to take.

No IFA who advises on transfers would ever say his or her client took anything but “good risk” when transferring. Yet the FCA remain unconvinced and so do the PI insurers.

The dirty water – good risk and bad, has been taken on by members and only time will tell how much of that risk was “good” and how much “bad”,

An update on what is going on to counter the transfer of bad risk

In the meantime, the TUC continue to report of “factory gating” by IFAs (Tideway and SJP named), the Pensions Regulator’s CEO accepts that members may not have been properly protected under the IRM and now the FT can reveal that it both the Pensions Regulator and the FCA are providing support to at least 8 large occupational  schemes whose members  under pressure from “rogue advisers. Being the partner of the Group Pensions Director of one of those eight, I can testify to the story’s validity!

Neither the Pensions Regulator , nor the FCA appear to be convinced that members are being properly protected. Yesterday morning I sat in a room with Lesley Titcomb and Margaret Snowden and Michelle Cracknell, all of whom spoke effectively and passionately about how to protect members going forward – from pension scams.

The output under discussion was the updated “Combating Pension Scams – a code of good practice”– published by Margaret’s Pension Scams Industry Group (PSIG). I am going to do my best to make sure this is on the desk of every pension manager and pension administrator. It can be downloaded from http://www.combatingpensionscams.org.uk/

The risk doesn’t go away – it just gets re-allocated

In the IRM, the idea is that risk is transferred to the PPF or insurance companies.

But in practice most of it gets transferred to ordinary people , many of whom would be regarded as financially vulnerable and not able to understand the risk they are taking on.

This is happening at an ever increasing rate and everyone is agreed that members are not being properly protected.

Organisations such as tPR, FCA and PSIG are doing their best to combat the unacceptable face of transfers – SCAMS.

But the root problem is not being addressed and will not till we have proper regulatory action.

We must stem this devastating risk transfer by banning contingent pricing and implementing other recommendations in FCA 18/7.

Trustees must be more aware of what is happening with their members and work with tPR and FCA as is happening with the eight schemes mentioned by Jo Cumbo.

Scheme administrators must must adopt the must adopt the good practice laid out in Combating Pension Scams; a code of good practice (v2 -22/06/18).

Finally, we must find a way for IFAs and trustees to work more effectively together. I would urge anyone interested in how this can be done to join me and Al Rush at the Aberavon Beach Hotel on July 10/11 for the Great  Pension  Debate (2),

Tickets to this event are free, and can be obtained here.

pension debate

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to When we “de-risk” – where does the risk go?

  1. Robert says:

    In the 1980s pensions mis-selling scandal, hundreds of thousands of people were lured out of their final salary pensions with the promise of fantastic returns if they invested the money in a personal pension. The promised growth rarely materialised but sky-high charges did, and as a result those who had transferred their final salary pension were worse off. They did get compensation but it left a very nasty taste in the mouth of those who had been ripped off, consumer groups and others who had seen this scandal in the making.

    Since pension ‘freedoms’ were introduced in April 2015 there has been another mass migration of people who had previously been due an escalating income for life and a guaranteed tax free sum from their defined benefit pension scheme, which has happened all over Britain.

    In your view Henry, do you think this mass migration from Defined Benefit Schemes could be a repeat of what happened in the 1980s or is the situation now very different?

    • henry tapper says:

      i think about this question a lot. Today’s compensation culture means we could see ambulances at any eventuality, the FCA are clearly treading a fine line between putting its foot down and wanting to leave the market to it. I think tPR is less sanguine. Either way, were we to see a serious detoriation in markets, we can expect to hear a lot of hollering

  2. JHA says:

    Henry, please can you not confuse SJP with the description IFA although that may be the impression that this firm would like to give (and allegedly does on occasions). They are a restricted firm. I have tried to establish the same for Tideway but their website does not claim either way so not entirely sure where they are positioned in the IFA/ Restricted adviser world.
    You have only mentioned IFA in your blog above and yet the firms you have castigated are not or may not be IFAs.

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