The FCA has published the second of its analyses of the DB transfer market which shows how the trend to “de-risk” DB liabilities by buying out liabilities through CETVs has continued apace.
This article argues that – blameworthy as many advisers were, they are getting the blame in isolation. In practice, the DB transfer fiasco which happened in the second half of the last decade was only partly the fault of advisers. There were plenty of others with their fingers in the pie and they are walking away from this without blame or even investigation.
This complicated chart shows the percentage of transfer inquiries that proceeded to transfer (purple line) without triage and the lower percentage that occurred where advisers were able to knock some transfers on the head at an early stage (the pink line). Advisers who did not use triage completed a much higher percentage of cases (dark blue line). The turquoise line represents people advised not to transfer.
What’s clear is that something extraordinary happened from the third quarter of 2016 to the end of the summer of 2018. We know that what happened was
- IFAs discovered contingent charging
- Transfer values fully reflected the decrease in discount rates created by AE
- DB schemes were operating de-risking programs without limitation.
The FCA report on one of these three factors , suggesting that the causes of the surge in transfers was primarily a result of IFAs finding a good way of getting paid
The FCA show that there was a clear correlation between the size of transfer and advice to transfer (with a clear implication that both contingent fees and future “assets under management” was a motivating factor for advisers
the FCA point out that virtually none of the money transferred went to workplace pensions , again suggesting that advisers were motivated by the advantage to them of using vertically integrated products
Finally , the FCA show that advisers continued to pander to insistent clients to a much higher degree than they used workplace pensions, the suggestion being that the customer is always right , providing they are lining the adviser’s pockets.
But this is not just about a failure from transfer advisers…
There are two reasons for this
1, The impact of QE on CETVs was never properly managed by TPR
Heinous as the behaviour of many advisers was, there are two other factors for the FCA to consider. The first is the destruction of value that was created by the increase in transfer values from 2009 onwards as pension schemes moved out of equities and into gilts at a time when gilt rates plummeted. The most extreme example I know of was the near doubling in CETVs at BSPS, where some CETVs more than doubled in the early part of 2017. The change of strategy was driven by the Pension Regulator’s demands for the scheme to take less risk as the sponsor’s covenant appeared weaker.
This trend for schemes to take less risk continues to this day, not only does it further weaken sponsor covenants, by driving up contribution rates, but it drives up transfer values , increasing temptation for those for whom a CETV is irresistible (both client and adviser). The Pensions Regulator has never acknowledged the impact of de-risking in a time of quantitative easing as a factor in the surge of transfer values, preferring to allow the blame to sit on adviser’s shoulders. The truth is that nothing was done to protect schemes from the impact of paying out over-inflated CETVs and there was a reason for this.
2. The promotion of CETVs was coming from corporate and even scheme advisers
I was working for an actuarial consultancy for the period covered by the FCA’s analysis and could see how hard the corporate advisers were pushing for de-risking programs to be introduced by those managing DB schemes. Every time CETVs were taken, the corporate balance sheet was strengthened by the difference between the balance sheet cost of the member liability and the CETV (which was invariably lower). Those incentivized to improve the balance sheet (senior management) could see the de-risking programs put in place by corporate advisers putting pounds in their back pockets.
What actually occurred was a massive pay-out in bonuses to the senior executives of sponsors and to their advisers, resulting from people taking transfer values. Even though the transfer values were ruinously high, they were not as ruinously high as the balance sheet liabilities they took out. This madness was entirely down to the accounting policies that required corporates to evidence the liability of their DB scheme as the cost of buy-out. The exploitation of this accounting loophole by senior executives and their advisers remains one of the most heinous cases of poor British corporate governance of the last decade and nobody is calling it – least of all the Regulators.
I do not absolve trustee advisers from this, there was a great deal of complicity between the trustee and corporate adviser as there was between trustee and sponsor (whose interests were often aligned) – as they were represented by the same people.
Only half the picture
Ros Altmann has written powerfully on the failure of the FCA to slam the door on contingent charging when it should have been slammed (when BSPS came to light in late 2017 – or earlier). But even she has not fully called the causes of the catastrophe that saw maybe £35bn be jemmied from DB schemes for no good purpose.
I would point the finger at the Pensions Regulator who was responsible for the conditions which allowed the craze for transfers in the first place. I would also ask where the bodies that regulated the behavior of corporate actuaries (including the ICAEW and IFOA) were.
It is not right that the de-risking programs that were instigated by bankers, accountants and actuaries are ignored – while firms such as LEBC who advised the members are hung out to dry.
It is not right that the Government policy of QE, could end up doubling transfer values with no one calling this Lady Godiva of financial economics. Pensions did not double – the cost of providing pensions doubled. But it only doubled because of the mania for de-risking, created by consultants, encouraged by TPR and exploited by everyone.
The FCA need to be tough on financial advisers but they need to be tough on themselves and TPR too. They need to be tough not just on crime – but on the causes of crime.