I am cross that an established firm of actuaries get on the front page of the FT for kicking IFAs for their advice on pension transfers
Mark van den Berghen, principal and senior consulting actuary at Buck, a consulting firm that lodged the FOI last year, said: “This latest information from the FCA is alarming and should worry all involved — providers, advisers, and scheme members.”
I get crosser still when Buck’s MD, sees this observation as a cause for celebration on linked in.
I have read Buck’s research which falls into the “no shit Sherlock” bucket.
Buck’s FOI request shows that the current system may be producing outcomes that are unlikely to be in the best interests of the majority scheme members. With many of these members switching from DB schemes to DC schemes, it’s likely they will be exposing themselves to investment and longevity risks which could impact their standard of living in retirement.
Actuaries know about investment and longevity risks and they are at their best when they explain these things to us , as Stuart Macdonald has been doing on twitter this week
Chart below shows cumulative mortality rate through the year, clearly indicating just how much death rates have fallen.
2019 annual mortality improvement is approx 3.6%.
Implication is likely to be a small increase in life expectancy when CMI_2019 is released in early March. pic.twitter.com/IsHXnI8ESn
— stuart mcdonald (@ActuaryByDay) January 28, 2020
Actuaries are at their worst when they hold their nose over the behaviour of others , when that behaviour was as a consequence of failings in the system which result from actuarial assumptions being applied and not explained.
Such is the case with Pension Transfers.
If you go to http://www.finalsalarytransfer.com , a site run by Tideway Investments, you can input your defined benefit pension and find out the likely range or transfer values.
You might well ask why something so simple as a pension of £10,000 a year might attract such a wide variety of transfer values. Clicking on the left hand box gives you a partial explanation.
Transfer values are individually calculated by your scheme’s actuaries and values will vary from person to person and scheme to scheme, so we have given a range within which most transfer values should fall. As a guide to where you might be in the range:
The nearer you are to retirement the higher up the range you should be
The more generous the annual increases to your pension in deferment and in payment and the larger the widow/er’s benefit, the higher up the range you should be
If you are in a funded state-backed scheme, your transfer value will likely be lower down the range
If your scheme has a large deficit, your transfer value could be significantly lower
If you are in an unfunded state scheme, you will not be offered a transfer value.
Actually, the biggest factor driving the transfer value is the discount rate used to establish how much money the actuary needs to set aside to meet the future promise. That discount rate can vary from the gilt rate to the return on equities and – because of the way compounding interest works, can mean that a scheme that invests in equities gives low transfer values and one which invests in gilts, gives high transfer values.
When a scheme moves from an equity to a gilt based investment strategy (when it goes defensive and “de-risks”, transfer values shoot up. This is what happened at the British Steel Pension Scheme in March 2017. Some steelworkers found their transfer value almost doubling – and they didn’t get why.
People who had taken transfer values at the lower rate, started moaning that their mates with the same benefit, were getting more than they were. The confusion that ensued snowballed into a crisis in Port Talbot and in Teeside.
Around this time I started writing articles on how transfer values worked, this led to Al Rush asking me to explain things at a workshop run by my actuarial colleagues at First Actuarial. What started as a meeting in a hotel ended up being the first Great British Transfer Debate in an aircraft hanger outside Peterborough.
At this even, my then colleague Alan Smith, explained how transfer values worked and to this day, this is the only such lecture I have heard being offered by the actuarial profession to IFAs .
The failure of the actuarial profession
As the Great Pension Transfer Debate was going on, I was trying to talk to the BSPS trustees about the trouble that I and others (including Al Rush and John Ralfe) could see coming. We had been invited onto the pages of the steelworkers Facebook pages where we found steelworkers trying to make sense of what was going on. At first it looked likely that BSPS would go into the PPF, then a deal was done that would allow a second BSPS to emerge and workers were asked to choose between going into the PPF or BSPS2.
But most workers were much more interested in news that they had a third option, news that came their way from IFAs who were explaining this option, often in a very bad way.
Here is a little poll carried out by one steel man on the Facebook page , in October 2017 – around the time their “Time to Choose” period began.
Unfortunately, my proposal to the Trustees of BSPS were rejected. They were that a transfer helpline be established and that resources be pumped into explaining transfer values and why they might not be the best thing for members to take,
Instead, BSPS, following a tendering process, set up a guidance helpline which could not deal with pension transfer issues. Ironically, the firm appointed to provide this guidance has now been stopped by the FCA from giving the transfer advice it was best known for. The tendering process was established and run by a firm of actuaries.
Speaking to the then Chair of BSPS, some months on from Time to Choose, I asked why it hadn’t occurred to the Trustees that so many members were minded to transfer, he pointed to his years of running the scheme where transfers were unheard of.
Why are defined benefit transfers so high?
I have written blogs on this many times and it always come back to the same thing. It is because most defined pension schemes have de-risked to a point where the discount rates have fallen to a level where the transfer values are often a multiple of 40 times the pension forsaken.
The Trustees supposedly choose the investment strategy but they are often strong-armed into de-risking as a result of zealous actuaries and zealous regulators who see their jobs of maintaining scheme solvency as the big thing. This is why BSPS de-risked.
So the reason why DB transfers are so high is because of the advice of actuaries and the reason why Mercer now estimate £80bn has transferred out of DB schemes in the last 5 years is because IFAs have advised that the money can go. Undoubtedly the FCA are right and a lot of that money shouldn’t have gone- for a whole load of reasons.
But in all this, I do not see where Buck Consultants or almost any of their rivals were actively involved advising members or their advisers or indeed the trustees and the sponsoring employers of what was going on.
Actuaries not doing their job
Yesterday I published a blog by a couple of IFAs which contained the following statement.
Our experience of large actuarial firms has been that they purported to advise the rank and file of the say 2700 employees of the large Lincoln company that they provided pensions to. The problem was that they failed to communicate with, let alone understand, the individual members and only ever consulted with the top management of that company
This is what happened at BSPS and what has happened to countless DB schemes which have collectively shed £80bn.
For actuaries to point fingers at IFAs from ivory towers is wrong and it makes me mad. For them to congratulate each other on getting onto the front page of the FT for pointing to the open stable door, beggars belief.
They had the power to guard that door and they and the trustees could and should have done more to protect those members who took transfer values against their interests, from doing so.
Sure the FCA could have done more by micro-managing the process, sure the Pensions Regulator should have understood the consequences of de-risking at member level and sure a lot of IFAs were greedy and opportunistic.
I worked for a firm of actuaries and even First Actuarial could have done more. Actuaries simply failed at their job – which is to get people’s pensions paid.
Actuaries have nothing to crow about when it comes to what we have seen happen. They should accept their share of the blame and be contrite, they should not seek to promote themselves, as Buck are doing, on the back of a “wise after the event” report.