Peter is not the only person who has commented on my blog yesterday. I know that people value the right to transfer their defined benefits to a pot which gives them freedom from pensions. Peter is right that some people will be able to bequeath more to their estate using a pension pot than from taking benefits as pensions.
Could we put the genie back in the bottle?
Restrictions , once lifted, are hard to put back in place. Norman Fowler let the genie out the bottle in 1987 and since then , the right to a cash equivalent transfer value has been available to all funded pension schemes.
But unfunded pension schemes, such as the state pension and arrangements for NHS, teaching, civil service and police staff do not offer transfer values. The right to a CETV from a pension scheme is not universal and it’s worth pointing out that some public sector pension schemes are funded and do offer CETVs – the local Government Pension scheme is one, the parilamentary scheme is another.
So the right to a transfer value is not universal and it can be rescinded. The rules for unfunded schemes changed in April 2015 before which you could transfer out of them. There are plenty of other situations that deny you a transfer- for instance if you are within a year of your scheme retirement age – or if you are actively accruing benefits – or if you are taking them!
The genie often has to stay in the bottle and sometimes has been put back there. What I think should happen, that CETVs are banned, is possible.
If it’s possible – is it desirable?
Taking away liberty has to be justified by the “precention of harm to others”. I believe Peter is right and that many of his friends are happily enjoying a liberated pot that would otherwise have been paid as a pension.
But his friends do not represent the generality of the population or indeed the generality of those with DB pensions. The FCA consider more than half of CETVs shouldn’t have taken place. They do this on financial grounds.
But even if the FCA is wrong, let us balance the damage of wrongful transfers with the benefit of those that went ahead for the right reasons. In my opinion, the potential for harm from a CETV being badly invested outweigh the upside from a successful investment of a CETV. I say this because the default position for those in a defined benefit pension scheme is to receive an income for life, increasing with inflation and payable to a surviving partner. The default is there for a reason, people need pensions and the type of people who need pensions most are those who don’t have alternative sources of income (portfolio careers, property empires etc).
So I see the primary argument for banning CETVs as the assymetry of risk. The risks of getting it wrong outweight the benefits of getting it right – over the general population.
The toxic carrot
The other difficulty with CETVs is that they create enormous temptation for advisers and pension providers, temptation to put their interests before those of their clients.
The Government has reduced the capacity for the market to indulge itself in malpractice, initially through threats and latterly through action – most importantly the banning of conditional charging for transfer advice (no transfer/no fee). Conditional charging created such a conflict of interest that the Government was forced (through the FCA) to restrict people’s liberty , for the harm the abuse of that liberty had done.
Conditional charging wasn’t the only toxic carrot. Advisers who vertically integrated their advice with wealth management, were able to get double-bubble fees from the investment of the CETV with both advisory and wealth management fees payable “ad valorem” . They could even argue that as the fees payable were based on the value of the fund managed, they weren’t conflicted but aligned. This argument has been dismissed as fallacious but persists in advisory circles – such is the power of the temptation.
I argue that the Government should consider closing the right to transfer for the greater good. But I don’t know whether they should or not. We may have reduced transfer activity to suffecient levels that it is only people like Peter’s friends who take them.
If, as XPS estimate, the number of CETVs is 50,000 pa. then that may be an acceptable number.
But if of those 50,000 , more than 25,000 are considered by the FCA – “bad transfers” it is clearly an unacceptable number.
And if the harm done to some of those 25,000 can be proved to seriously damage their happines, the utility of CETVs needs to be called into question.
We have got where we have today because we asked questions about what was going on in Port Talbot and elsewhere and we need to continue to ask those questions so long as CETVs are available.