Moral hazard and the “compo culture”- must good pay for bad?

Clemence writes with a breath of fresh air about the capacity of advisers to make a difference. It is good that young women are coming into the advisory profession. She is right, but she should not be so hard on her profession. The door was not open to good advisers, but the charlatans found the back door and we all know what happened then.

The BBC ran an article about what was going on in the north-east , way before Al Rush and I went to Port Talbot, describing how an adviser had brutally advised a transfer go ahead  in the full knowledge that the transfer would increase. It was a case of a bird in the hand, a sale on the sales-board. But no-one recognized the steelworker who had been shortchanged by £200,000 was part of an epidemic of bad advice that was spread by a union who profited by the fees of the adviser- Lighthouse.

Even today, the issues surrounding the relationship of the unions and that particular adviser aren’t discussed. Nor the complicity between the senior management at Tata, many of whom would have had to have taken huge PPF haircuts on their BSPS pensions, with senior union officials in the creation of the Regulatory Apportionment Agreement.

No one has taken a step back and asked what would have happened if the BSPS, had – as originally been planned, slipped into the BSPS. What would have happened is that a large proportion of the 7700 transfers would not have gone ahead, the costs of the RAA would not have fallen on Tata and money would have been freed up to support the steel industry in South Wales and the North East.

In retrospect, the root cause of the BSPS scandal came from the RAA, which gave people with no financial background- impossible choices. I saw several local IFAs in Port Talbot, they were trying to sort out the mess, but the people who we didn’t see, were the advisers behaving badly.

Al Rush’s creation of Chive shows that advisers could mobilise and deliver help when the need arose, but the need for Chive was before and not after the event.

Giving people impossible financial decisions

The thread which Clemence started has an interesting progression.

Alan Smith connects what happened at BSPS to the FSCS levy he pays next year

The more substantive point is made from a very thoughtful tweet from Dennis Hall

The internal issue Dennis refers to may be the failure of the FCA to protect the public, but there are wider implications to this than how the FCA behaves. The “compo culture” around transfers goes back over 40 years to the introduction of CETVs by Norman Fowler in 1987/8. The moral hazard that exists beyond the FCA’s regulatory perimeter was obvious throughout the negotiation of the BSPS RAA, where the large advisory firms acting for Tata (PWC) and the Trustees (WTW) along with numerous lawyers, union officials and the Pensions Regulator created an RAA which transferred risk onto steelworkers in the form of  choices they found impossible to take. Financial advisers took those choices for them and they followed the line of least resistance – the “no-brainer” of taking a transfer.

There are other such choices which create moral hazard

Over 700,000 people in Britain each year are faced with impossible choices around how to convert their pension pots into pensions.

In a few days, the FCA will oversee the launch of investment pathways which are supposed to provide obvious solutions to what the economist Bill Sharpe called “the nastiest, hardest problem in finance”.

We are no more equipped to take these choices than the steel men were to take those.

But rather than find a solution to the systemic problem, we are insisting on the production of yet more paper which will land on people’s door mats as part of their wake up packs.

To take the choices we demand of people, we need an army of financial advisers who don’t exist. Those who are trained to give advice are properly dealing with those wealthy enough to pay for their services, typically out of the wealth in their pension pots.

Meanwhile, those who reach a point where they need to start spending their pensions are left with the cold gruel of Pension Wise.

Moral hazard and the compo culture, must good pay for bad?

As Dennis hints, there is something wrong with the system which will mean that the moral hazard will continue, the compensation culture continue and increasing pressure will be applied to those trying to do good , to pay for the bad.

This systemic failure needs a circuit-breaker which removes the decision and creates a default solution which while not optimal for everyone, means no one should get left behind.

We need to return to a default pension solution. At Tata, the default could and should have been the PPF, for people who cannot take an informed decision on converting pot to pension, we should look at CDC. Defaults have served workplace pensions well and show that we do not have to compel people into saving. We need people to spend what they have saved, both for their good and for the national good.

To implement such a thing, will need bold Government and regulators who recognize the limits of their capacity. I am hopeful that we have both and hope that going forward we can see them working better together to reduce moral hazard, eliminate the compensation culture and ensure that the good can get on with being good, while the bad go elsewhere.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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