Should we stop transfers for the next 6 months?
Yields are down, markets are down, has there ever been such a time to transfer your pension rights?
That’s what many people may be thinking and if you were a financial economist you could construct an argument to say that transfer values have never offered such value for money.
So why is Ros Altmann, herself an economist, calling for a temporary ban on transfers.
In her own words
“it is impossible for trustees of pension schemes to be sure of the underlying value of the pension funds, or each individual’s share”
What Ros is referring to is the rationing of money offered by trustees to those taking a transfer according to the scheme’s ability to pay.
Operational problems with transfer values
What actually happens is that when the scheme actuary issues an “insufficiency report” to the trustees telling them that the scheme is underfunded, the trustees should take action and reduce the transfer value.
For example, it the actuary says the scheme only has 85% of its liabilities covered by assets then the trustees might apply a reduction of 15% to the full transfer value. For a typical member this would reduce the amount paid out over the PPF level of compensation by around a theoretical 45%.
In normal circumstances, these theoretical calculations might have some meaning, but Ros’ point is that we are not in normal times
- The liabilities of a pension scheme cannot be readily valued when the valuation rate is determined by emergency measures (the slashing of interest rates)
- Assets cannot be properly valued.
- Many funds depending on physical assets are insufficiently liquid to meet large cash demands and are currently gated.
- Whatever the valuation of the fund one week, could be wildly different the next, the typical guarantee periods for transfer values are too long for comfort.
Add to this , the cost in terms of actuarial and administrative resource trying to administer transfer values, and you can see the kind of frustration developing between advisers, schemes and members, that characterised the end of British Steel Pension Schemes’ Time to Choose.
We are almost all in some kind of shock at the moment. That shock makes us vulnerable, makes us prone to making ill-considered decisions based on fear. Again I think of the situation that grew in Time to Choose where people wanted out at any price.
The great crime in Port Talbot and elsewhere was that some advisers played to that vulnerability rather than encouraging more rational behaviour. We know now that they were encouraged to advise against member’s interests because of the financial incentives from encouraging transfers to go ahead. While I think advisers have to be more cautious today, those incentives still exist and we shouldn’t underestimate the financial pressure some advisers will be under. Some advisers themselves could be considered vulnerable.
The case for intervention
The operational issues are with the Trustees and as much as they impact scheme funding levels, a matter on which the Pensions Regulator could provide immediate guidance. Trustees would need to have the strongest of steers from tPR to stop providing transfers, or balls of steel.
The FCA has still to determine whether it will allow conditional charging gong forward. It has no history of intervening in market practice preferring to wave its stick in the air and leave the IFA to make up his or her own mind. Many IFAs have been as influenced by the increase in PI premiums (and retentions) as by FCA threats. Nonetheless , the FCA has closed a number of IFAs and a strongly worded statement from the FCA on the transfer situation is as much as we can expect right now.
In short, I think it is going to take HM Treasury and DWP to get involved for a ban to be put in place and I am not sure that the regulatory bandwidth – stretches this far. But Ros Altmann is a lot closer to the power-brokers than I and her call to action may be directed at the likes of John Glen , Therese Coffey and Guy Opperman.
Certainly if Government can lock the doors of our houses, it can lock the door to our pensions.
Small pot exemptions
Speaking with the Daily Telegraph on this yesterday, I was told that some advisers suggest that small pension pots (valued at less than £30,000) could be unlocked to protect livelihoods, mortgage arrears and financial ruin.
The amount of pension needed to generate a £30k transfer value is typically less than £1000 pa, so the argument is that a pension is a cheaper form of immediate finance.
But an increasing income of £80pm for the rest of someone’s life is a much more valuable benefit than can possibly be imagined by the person prepared to give it up for short term financial relief.
Unfortunately there is no-one to stop someone with a very small pot, taking the money. Because of the “small pot exemption”, members of DB schemes with CETVs less than £30,000 can just be cashed out – the transfer payments leaving a DB scheme, into a SIPP and from there straight to the creditor or worse- the scammer.
If we are to ban transfer values, then closing the loophole that gives vulnerable people the right to self-harm , should be part of that ban.
Protection of the most vulnerable
We are in the midst of a national emergency, we await further financial measures from the Chancellor to protect the self-employed and those who are so under-employed as to rely on the various parts of universal credit – and pension credit.
These include people with high levels of currently unserviceable debt who (if they have pensions) are most tempted to liberate those pensions.
Pensions are for life and not to be used as a sinking fund for those who are in crisis. Ultimately we have a benefits system which acts as a safety net and prevents people from making themselves long-term casualties. The tax-relief they received on pension contributions was granted to protect not encourage people from becoming a burden on others.
Why I am with Ros Altmann
Any kind of Government intervention on transfers should be deliberate and justified.
I think that it’s brave of Ros Altmann to take this position (she has actually argued for people taking transfers in different circumstances).
It is a recognition of the extreme circumstances people find themselves in which make them vulnerable, those with least – most so. It is also a reflection of the dire circumstances of pension administration (referred to in the same blog). We should be focussing pension administrator’s minds on cleaning up data – not on the substantial burden of transfer value administration.
But most of all, whatever people take today – as transfer values – is unlikely to be fair value for all.
If transfer values are at an all time high (and I think that full ones probably are), then to manage those transfers through insufficiency reports will be a huge task and one that most actuaries and trustees will struggle to execute.
At the end of this argument there is one phrase ringing in my head
You’re better off at home
When it comes to pensions – stay where you are.