It didn’t take long for the ripples from the Lloyds Bank GMP equalisation ruling to reach the crazy land of pension transfers. Within a few days of the Judge Morgan’s verdict we hear that thousands of people are having their pension transfers delayed while Trustees work out what to do (or in this case – what not to do).
First some thoughts on the reports in the Financial Times (thanks Jo Cumbo)
- No one has yet shown me a scenario where the ruling could decrease a transfer value. I stand to be corrected on this, but the issue for the trustees is not about “claw-back”.
- The sums involved where someone is due more pension due to the Lloyds ruling are small. We’ve estimated the maximum capital payment at around £3,000. In the context of an average CETV of £450,000, we are not talking major adjustments.
- Reports that the cash payment of “trivial” pensions are also being stalled (e.g. those so small that they can just be paid out as cash) suggests some trustees are just putting out a blanket ban on pay-outs.
Second- some more general thoughts on trustee behaviour in these cases.
It seems right that when faced with the consequences of something they don’t understand in the first place, that those in charge slam on the breaks.
Here’s glamorous Chantal Thompson of Baker and Mackenzie
“We understand that one firm is saying that trustees should not proceed with transfers until benefits have been equalised, albeit that there is likely to be a considerable amount of work required to equalise all GMPs under a scheme,”
It’s not clear whether the “firm” is an actuarial consultant or a firm of lawyers, either way it appears to be influential.
I thought the job of the adviser – who seems to be behind this – was to help Trustees to understand the consequences of the ruling on their scheme. It should not be hard to work out that if a transfer payment is made and there’s more to come, then more can be paid to where the first lot of money went.
In which case, a simple message sent to anyone in midst of transfer saying
“we may want to pay you some more as a result of this Lloyds thing – do you want the original amount now or do you want to wait till we’ve sorted things out to get your transfer”.
When in doubt – do nowt?
No doubt the “advice” came with a risk warning that – should transfers not be halted – there was a risk to the trustees (and pass-on risk to the sponsor).
But there’s an equal and opposite risk in this, which is the risk of putting the backs up of the members you’re trying to serve.
If you ban transfers, even for a few weeks, there will be people who don’t get their transfers paid in the six months window of a transfer value, people who may have to re-start the transfer process at great expense to all concerned.
So doing nothing is not a risk-free action at all. It just smacks of ignorance-induced panic.
Common sense needs to be applied
The word “pragmatic” used to appear in First Actuarial’s promotion of itself; we’ve rather stopped using it in favour of “common sense” and other phrases like “common decency” and ever “treating our customers fairly”.
I really don’t think that people who are currently going through the quite traumatic process of taking a pension transfer, should be made to pay for the ignorance of trustees of the impact of the Lloyds Ruling on their scheme.
The risk of under payment is small and can be dealt with in a common sense way as I’ve indicated above.
As for insurers refusing to accept transfers paid without GMP’s being equalised, this is even harder to understand. Is the thought that accepting the bulk of money today with the balance to come, too hard for an insurer to administer? What is the risk to the receiving personal pension?
I know that some pretty smart people who work in pensions read this blog and perhaps someone might like to contact me to tell me why the system is grinding to a halt? Is it the actuarial equivalent of the wrong kind of snow, or is there something that I’ve missed.
While I can understand Trustees and Personal Pension Providers being cautious, surely the solution is to take advice rather than slam on the brakes!
What of transfers past?
We know that £36.8bn flew out the DB door last year, the vast majority of the money transferred contained an allowance for GMPs given up. We also know that the Lloyds ruling could cost occupational schemes a further £15bn in increased liabilities. What we don’t know is whether the liability for those who have taken transfers (and signed away all rights) , who should have had the “windfall” of GMP equalisation included in their payment.
Nor do we know if the bulk buy out of members (where members signed away nothing), lays the onus to equalise (and meet the equalisation cost) on the people who insured the buy-out or the people who paid for the insurance (the trustees). The same could be said for other consolidations.
I don’t see anyone holding up the payment of pensions in November till the impact of this question is fully absorbed. That could be the precedent for the payment of CETVs.
So I am in the camp of Charles Cowling of JLT when he tells the FT
“Our current view is that we should continue paying transfer values on a ‘business as usual’ basis — recognising that top-ups may be necessary at a later date once GMP equalisation is sorted,”
We need to treat people fairly. If we do, many of the problems that beset advisers – whether personal or corporate, in terms of Professional Indemnity Insurance, simply go away.
Or to put it more succinctly
Morality and prudence need to work together , not compete.