Dangling temptation in our way – DB transfers in a time of pandemic

Final salary transfer

I read this and my heart sunk.

It sunk for the hundreds of thousands who have taken their transfers and must now be wondering why they didn’t wait for ol’man Covid.

It sunk for those advisers who have either been barred , blocked or chosen not to offer transfers.

And it sunk for those deferred pensioners with the right to a cash equivalent transfer value who are going to read the LCP research in the FT and go on a hunt for an advisor to unlock their treasure chest.

Bart 2

It simply doesn’t make sense that while markets have fallen, DB transfers have risen by 30% in the pandemic. It exposes the nonsense of DB pension valuations for what they are, academic exercises uncoupled from reality.

Why oh why?

This is the lunacy of pensions lock-down, the mania for self-sufficiency, the drive to de-risk.

All the prudence that has been built into  DB pension schemes has been at a cost to jobs, investment as George Kirrin pointed out in a comment on a recent blog on DB scheme funding  by Keating and Clacher 

And where does this prudence go? It is transferred to the wealth management accounts of those who by accident, have got lucky with a pension windfall.

Merryn Somerset Webb said a few years back now “If I had a  DB pension I’d take my transfer now”.  If it wasn’t for the economic nightmare that is upon us, interest rates should now be rising as we finally kicked off the shackles of austerity. Transfer values should be going down and the insanity of discount rates set at 1% or even lower would be a thing of the past.

Why oh why do we continue to dangle these over-inflated DB transfer values? They aren’t prudent and are an offence to the millions who face personal hardship at this time.

The details

Here’s an excerpt from the FT report

Analysis by Lane Clark & Peacock, the pension consultants, showed the average value of defined benefit pension transfers reached £556,000 in the second quarter of 2020 — an increase of 30 per cent compared with the previous quarter — and the first time in three years that the average transfer has exceeded half a million pounds.

Only about one in five of those who received a transfer value quotation from their pension provider in this period opted to take the cash; the lowest quarterly take-up rate since 2016, according to LCP.

Although average pot sizes increased dramatically, the analysis also found that overall levels of transfer activity in the period fell by 25 per cent — partly because some pension schemes paused transfer quotations under lockdown, in line with regulatory guidance.

But we are also in that period before the arrival of the ban on contingent charging where advisers are reconsidering the economics of transfers. The risk of getting it wrong are substantial (which is why PI premiums for those still advising on them are so high). Coupled to this, pressure on fees, now they can’t be cushioned by contingent charging, mean that advisers may decide their boots are full enough.

So what can be done?

Many trustees still see CETVs as the victimless crime. They get liabilities away at below buy-out cost and please employers who can book the technical accounting advantage into their short-term reporting (often with positive impacts to management’s remuneration).

But there are victims. The true discount rate for these liabilities is what Con Keating and Iain Clacher call the CAR or the underlying rate of return needed to meet scheme liabilities over time. If the CAR was used as the discount rate ,  CETVs would be slashed and schemes would retain pensioners.

Of course that isn’t going to happen , but if we took a long-term view of our DB liabilities we would continue the ability of trustees to voluntarily ban transfers. Indeed we might decide to put funded pensions on the same basis as their unfunded counterparts and just stop transfers where the discount rate fell below a nominal level (say 3%).

bart 3

Bart (not Ben) Huby. LCP’s actuary with the numbers

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Dangling temptation in our way – DB transfers in a time of pandemic

  1. Peter Tompkins says:

    I don’t get it. I cry hurrah for anybody who wants to take the opportunity now presented. I have a relative who is over the moon that she can leave a DB deferred benefit behind and invest for the long term in a DC product which will give her the flexibility she wants for her retirement plans.

    Less you think I am in favour of DB transfers as a whole, I also have a close friend who was being persuaded by St James Place to take a DB transfer. But I gathered that he did not want flexibility for his retirement income and I cautioned him strongly against taking the transfer, because the certainty he had in his hand was worth far more than the DC prospect in the bush. And the charges were terrible!

    You say that it doesn’t make sense for DB transfers to be going up. The cost of indexed linked stocks which represent the value of an investment that meets the liabilities for index linked pensions has been going up in the light of the current economic situation. The fortunate punter who wants to be invested in the stock markets for the long term is able to buy shares at better values than was possible six months ago. But sensibly matched pension plans will not have seen their values fall because they will be holding matching investments, which have not suffered in the pandemic.

    I am aware of the CAR philosophy to which you refer. But this is discredited in all serious actuarial and financial circles.

  2. John Stanley Mather says:

    “over-inflated DB transfer values”, If this statement is true then surely it is negligent not to take the money.

    It seem that more and more DB schemes fail to deliver on the promises. Is this a mis selling scandal unfolding ?

    Who will compensate when there is no IFA to blame or to pay for the mistakes of others?

    • Robert says:

      As a deferred pensioner of a DB scheme I have the right to a cash equivalent transfer value that has increased further due to the economic nightmare that is upon us (COVID-19).

      The question is……..am I being negligent not to take the money, which is a six figure sum?

  3. Mark Meldon says:

    Surely, the biggest issue with DB transfers – setting aside, if I may, the ‘hold or fold’ issue – is where can the CETV be invested if a transfer is taken? Whilst we can measure the costs involved with a SIPP/PPP/S32, we have a situation right now where it is terribly difficult to obtain much of a return on capital, a situation I can see persisting for perhaps many years, as financial assets are hooked on ‘QE Infinity’ and ‘ZIRP’.

    It seems to me that many individuals who have taken CETV’s have ended up in rather odd, return-chasing, discretionary managed portfolios that exhibit detrimental costs of ownership. The trade-off between the (admittedly inflexible) ‘security’ of a DB pension and the uncertainties and complexities of a DC environment are poorly understood by the overwhelming majority of consumers.

    One area rarely mentioned in this context is that of recipients (mainly women) of Pension Sharing Orders following a divorce. Suddenly, the DB pension that had been implicitly part of the marriage is gone, and the often inexperienced recipient is thrown on the rocks and shoals of DC at a particularly vulnerable time – a subject for further deliberation, Henry?

    Just last week, however, I took an enquiry regarding a gentleman with a CETV that is just a touch under £1m. He has, he says, other financial assets worth about £10m and merely sees the CETV as part of an IHT planning exercise, and that is difficult not to agree with.

    I also think that the end of ‘support’ and ‘deferral’ that will arrive soon will create a large number of new enquiries about pension planning in general. Whether that will be ‘good for business’, as well as ‘good for consumers’, we will only discover later.

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