With the benefit of hindsight…a blog on pension transfers in draft for 30 months



I never published this blog – it has been sitting in draft since early 2018. Re-reading it today, it is clear that everything the FCA are saying today was public knowledge in 2018. Judge for yourself, could and should the FCA have acted sooner?


IFAs and the defined benefit promise

This article explores the relationship between IFAs and defined” benefit schemes, one that has historically been uneasy. It argues that the polarisation of opinion between IFAs who see pensions as “pots” of wealth, and those who regard them as a “wage for life” has never been stronger. This polarisation is present in politics, demonstrated by the differing view on “pension freedoms” at the DWP and Treasury, and present in Regulation, with polarisation between the FCA and tPR’s approach to these same issues.

This deep divide is philosophically between those who believe is that the management of financial assets should be a matter for the beneficiaries of those assets (the member) and those who think the creation of a lifelong income, a matter for collective endeavour.

And the fault lines created by these polarised positions are clear to see, wherever you look.

They are apparent from the Work and Pension Select Committee’s inquiry into Pension Freedoms, which focussed on the divisions in Port Talbot between BSPS members desperate to liberate the wealth in their pension scheme and the Trustees, who were (until recently) oblivious to the demand for “pension freedom”.

The fault lines were equally apparent in the disputes between Royal Mail and its membership (represented by the CWU) and the current dispute between USS and its members (represented by the UCU). In both cases, the employer believed philosophically that it was doing the right thing by switching from DB to DC accrual, based on evidence that ordinary people value a pot of wealth rather than a wage for life.

Contrarily, members have said no to a DC pot and held out for a wage for life. In the case of Royal Mail’s membership, this will mean an unguaranteed CDC pension and in the case of USS members, a continuation of guaranteed accrual from a DB plan.

An IFA, reading these paragraphs, has every right to be confused. Steel-workers are not normally considered as candidates for wealth management, but with average pots of c£400,000, they proved to be of great interest to a large number of IFAs. Meanwhile, the professors and lecturers who one would imagine financially capable, have gone out on strike , rather than be switched to a DC pension.

The polarisation of opinion cannot be defined on socio-economic lines, nor can it be defined in terms of education. In fact, the pension freedoms seem to be as popular on the streets of Tai Bach as in the City of London.

It now looks likely that once all transfers out of BSPS are completed (some time in April), around £3bn will have moved from “pensions to pots”. This is roughly the same amount that has been transferred out of the Lloyds Bank staff pension scheme and around 75% of the £4.2bn that Barclays have reported moving out of their pension scheme. It was not long ago that KPMG were estimating the total transfers from DB to DC in 2017 would be £6bn. What has happened?

The explosion of transfers  that has happened from mid 2016 onwards, cannot be explained by the Pension Freedoms alone, indeed , in its 2014 impact analysis, the Treasury saw no reason for the changes in the tax treatment of DC pensions as having little to no impact on DB to DC pensions.

Nor can it be considered a function of quantitative easing or the shift of DB assets from equities to gilts. While there may have been a marginal shift (major at BSPS), quantitative easing and the trend for DB pensions to “de-risk”, were established well before 2017.

What I believe has happened over the past eighteen months has had everything to do with adviser confidence, especially confidence in the IFA sector. Underpinning this confidence is the rise in world stock- markets which has seen equity-based wealth management solutions deliver fabulous returns to their customers for nearly ten years. There is a sense among many advisers I speak to , of invincibility in market forces and the power of investments in growth assets to deliver better outcomes than can be achieved from DB pensions.

The second factor that has given advisers confidence, is finding a mechanism to unpick the lock on the CETV, without creating disruption to their client’s cash-flows.  I mean by this the practice of conditional charging. By putting the bill for advice at the back end of the advisory process, IFAs can achieve a painless transfer to their wealth management solution that enables them to be paid from a tax-exempt fund without concerns over VAT. It enables clients to release their “DB wealth” without reaching for their cheque book and  it is a very elegant solution to the problems posed by the requirement of those wishing to transfer an amount above £30,000, to take financial advice.

There is nothing uncompliant about conditional charging and it is now widely used by the majority of Britain’s 2,500 transfer specialists. However, conditional charging is showing signs of stress. Ten firms have now “voluntarily” handed back their permissions to advise on DB transfers , leaving hundreds of clients orphaned from the transfer process and marooned in DB.

A recent article in the Financial Times, saw the Personal Finance Society’s Keith Richards, claim that Professional Indemnity Insurers were jacking up premiums for those remaining PTS’ and denying some cover. The practice of outsourcing pensions advice to specialist Transfer Value Analysts, has come under considerable pressure from the FCA.

All this is evidence of the deep divide between those who see a pension as a “pot of wealth” and those who regard it as a wage for life. Many advisers, such as John Mather, consider the defined benefit system, so broken, that engineering a route out of DB for clients , is the right thing to do. Meanwhile, the FCA insist that from their sampling in 2017, 53% of transfers examined, contained either questionable or wrongful advice.

The Pensions Regulator and the FCA are at last working together to produce a joint pension strategy. In a recent session of the Work and Pensions Committee, its Chair- Frank Field- suggested that advisers and trustees were living in “different countries”. The same criticism has been made of the two regulators.

It remains to be seen where this will all end up, few believe that we have seen the end to the DB transfers. The results of SJP, Old Mutual, Prudential and many other providers, suggest that pension providers are now reliant on the massive flows of assets brought to them by advisers. Many advisers now seem as addicted to conditional charging as they were to commission and the FCA and Pensions Regulator, seem powerless to prevent CETVs becoming business as usual.

As always, the analysis of the issue , post-dates it. The transfer from pensions to pots will go on, till a point where either the available assets within DB schemes have been exhausted, or a proper brake has been put on the transfer process, most likely by a Government with the will to ban conditional charging.

In the meantime. we have to hope that those in charge of this new found wealth, can deliver on their promises.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to With the benefit of hindsight…a blog on pension transfers in draft for 30 months

  1. Eugen N. says:

    I think that in the case of BSPS the reasons why so many people transferred are not the IFAs.

    The issues are a lot more deeper, they are linked with the way the sponsoring employer was unable to fund the BSPS scheme. Henry, no one complained when the BSPS was closed to accrual and when a lot of other benefits were lost, like the retiring early at 60 with no pension reduction for people with longer service (20 years plus). That benefit for retiring early that many existing workers aimed for lost the active members over a couple of hundred millions pounds, something like £50,000 – £80,000 each.

    Added to that was the RAA pension cuts, some highly significative for members with pre-1997 service. The possibility that the BSPS 2 to fall into the PPF (and have another 10% cut) or some sort of zombie scheme (paying between 90% and 100% benefits) in case of Tata UK insolvency remains possible. There are discussions as we speak that Tata UK may get funding from the UK Government to the tune of £500 million.

    People working for Tata UK were aware of all these issues. Some IFAs too, and look what will happen in different scenarios. All these issues came in very short succession, and it was not easy on the members.

    Have some of the IFAs taken advantage of the situation and made unsuitable recommendations? The answer is YES. Would that be as high as 80%? I hope not.

    I am a bit sceptic the FCA letter would generate a lot of complaints. Probably 500 or so.

    Wealth management? I think it does not matter if you are steelworker or professor, you can have access to the service you need. You are also allowed to retire early, which is usually easier for USS members who have a NRA of 60, instead of 65.

    Members of the USS do not transfer because the discounting rate is high. The trade off does not work. Use the same discounting rates as for BSPS, and you will get lots of recommendations to transfer out. There is another reason, the USS members have a life expectancy longer than steelworkers, and that helps recommendations to transfer for people with shorter life expectancy.

    When you know your life is short, your objectives change a little. You want to do a bit more now, not later.

    Las going on strike: why do you think that steelworkers would have got more if they went on strike?

    Professors go on strike as they know the balance of power is in their favour. This may change now slightly with Brexit and coronavirus, and could lead to closure of DB accruals at some Universities too.

    • Robert says:

      “Members of the USS do not transfer because the discounting rate is high. The trade off does not work. Use the same discounting rates as for BSPS, and you will get lots of recommendations to transfer out. There is another reason, the USS members have a life expectancy longer than steelworkers, and that helps recommendations to transfer for people with shorter life expectancy.”

      “When you know your life is short, your objectives change a little. You want to do a bit more now, not later.”

      With regards to the life expectancy of steelworkers, my father who is now aged 80 and my grandfather who was 75 when he passed away both worked in the steel industry for many years. At 53, I am also employed in the same industry where I have worked for over 30 years……..We all remained with the British Steel Pension Scheme.

      The recent BSPS2 News Brief (June 2020) included this message from the Trustee Chairman:

      “There is much in the news just now about the impact the current unprecedented conditions have had on financial markets and on people’s savings. As a member of a defined benefit pension scheme such as the BSPS, your benefit entitlement is not affected by the current upheaval.”

      “Our investment strategy gives us a high level of confidence that the assets we hold will provide the cash needed to pay benefits – not only in the coming months and years but for so long as pensions are payable for decades to come.”

      This is very reassuring to me and many others.

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