It’s a shame for my loyal readers (Con Keating especially) that some of the most interesting comments on my blog are made on twitter and linked in. In yesterday’s blog I suggested that our former pensions minister, Steve Webb, was using the skills that won him “Spectator Minister of the year” in 2014;- specifically he was justifying pension atrocities in the name of freedom – specifically pension freedoms!
I am not alone in calling this
This may all seem a little arcane but there is substance in this discourse that informs on a wider debate about whether defined benefit pension schemes are a help or a hindrance.
Those arguing for de-risking see DB schemes as a corporate hindrance, shackling executives to low bonuses, shareholders to low dividends and the enterprise to low investment in its future.
Those taking the opposite position consider pensions promises that should be honored and not shipped out (along with all manner of risks) to be floated on choppy markets.
Having worked in a DB consultancy for 10 years I know of many consultants who have openly sold DB de-risking (aka the facilitation of transfers) as a means to give the corporate balance sheet immediate relief as individual transfers invariably cost less than the imputed balance sheet item of a “deferred pension”.
This argument is then stretched by suggesting that de-risking is strengthening the employer covenant, reducing the risk of the scheme going into the PPF and that transferring members are in fact doing remaining members a point. Believers in the old adage “if it looks too good to be true , it probably is” should be gulping for air at this point.
Providing a DB cash equivalent transfer value at the discount rates that result from the dash to buy-out/self sufficiency means paying a much higher price to de-risk than would be the case for open schemes. Proposals from tPR to force schemes into low-risk funds are likely to increase pension transfers still further.
There is a much clearer link to increased transfer activity and increasing transfer values than member desire to exercise pension freedoms.
Witness the British Steel Pension Scheme which reported virtually no transfers in the years following the announcement of the freedoms leading up to the announcement of the RAA in 2017.
On the basis of this information , the trustees believed that steelworkers were (even with the temptation of pension freedoms) were supine and fans of scheme pensions. I was told that this was the prime driver for the complacency that was identified in the Rookes report.
But early in 2017, the scheme – determined it would lock down its investment strategy , the Trustees shifted the investment of the scheme from growth to defensive assets. They abandoned an age-banded discount rate to a much lower flat rate The result was that some transfers nearly doubled, something that would have been foreseen by the employer’s actuaries and something that led to one of the largest mass-exoduses in British pension history.
I am not saying that the consultants to Tata purposefully encouraged the transfers or that the Trustees were complicit, but I am saying that they created the conditions for £3.2bn to leave the scheme to sit in a wide range of SIPPs, some – none too savoury.
Balance sheet relief or later life grief?
A point that is made too rarely is that we really don’t know what will happen to the £80 bn that flowed out of DB schemes between 2015 and 2018. Will it be used to replicate the defined benefit with former members buying escalating annuities and spouses pensions? Or will the money find other investment pathways – from Lamborghini to wealth preservation scheme?
I think it almost inevitable that a high proportion of the proceeds of these CETVs will find its way into the pockets of intermediaries and I see absolutely no argument to suggest that taking their transfers was the “no-brainer” that several welsh steel-makers believed them to be.
In all probability, a high number of people who took transfers will draw down too hard, from pots denuded by high charges and the money will run out before they do. We will not know this till the money starts running out, but expect in future decades to find a different debate about transfers.
In one corner will be steelworkers being paid a pension (probably by an insurance company as New BSPS looks headed for buy-out).
In the other corner will be those who have taken transfers. Some will feel winners but many won’t. This is what the FCA are thinking about when they question the basis of so many of these transfers.
This is what I mean when I say that employers and trustees must be aware that “balance sheet relief risks later life grief”.
POSTSCRIPT
This and my previous blog result from a webinar laid on by LCP and Royal London. These webinars are free – but we know that in this naughty world, very little is for free. The price of attending a webinar in these times is to listen and tacitly consent to the approach being taken.
There is here a worry that those with the capacity to host these events are now so powerful that they can dictate the way things are. So I ask…
Are consultants using webinars to create an oligarchal agenda?
I do not point Zola’s “J’accuse” at pension consultancy. It is true that they are paid by employers (directly or indirectly) and are keen to play to the employer’s agenda.
It is also true that the PPF, as much as any other superfund, poses an existential threat to consultancy earnings , once a scheme slips into it.
But that does not mean all consultants are compromised. First Actuarial’s response to the Pension Regulator’s proposals to the DB funding code shows that consultants can deliver non-hysterical messaging about the PPF and encourage diversity of strategy beyond the one size fits all dash to self-sufficiency.
Lane Clark and Peacock (LCP) where Steve Webb is a partner is a firm, like First Actuarial , with the interests of members at heart and I know that Steve Webb has ordinary people’s interests at heart!
Or can delegates re-create debate?
One trouble with these webinars that we get in is that the dissenting voice finds itself difficult to be heard. The debate recorded earlier this week was such a case with two good speakers arguing not in a dialectic , but to reinforce each other’s views. We are left with a largely muted audience to give tacit assent to the views being expressed.
There can be few more frightening examples of group-think than a webinar without dissent!
Credit LCP for letting me in and credit them for allowing the debate. I have been told on many occasions my questions are unwelcome to the host!
As with consultations, so with webinars – it is essential that we do not allow the conditions under which we live and work – to prevent a reasoned debate.