Stuart Fowler
Stuart Fowler has produced a counter-argument to that I put forward last week, it was published before my blog and I can’t say that my blog would have changed Stuart’s argument. I will ask Stuart for permission to publish it in full on this blog but for now will just provide the link – here.
The argument against a BSPS redress scheme
Stuart argues that a redress scheme for BSPS would not be fair on those paying for it (the financial services industry and in particular IFAs who would pick up extra cost through higher PI premia). The blog is the best argument for taking transfers I have read and it is not surprising that Stuart is held in high regard both among his peers and by regulators.
To cut his sound technical analysis of the “arbitrage” between artificially enhanced CETVs and the real world economics of equity returns, taking transfers was indeed a “no brainer”. Though I doubt that many IFAs used as robust a model as Stuart’s , their conclusions would be the same “to me this is a no-brainer“.
The counter-argument is of course that there is a difference between an IFA and a steelworker and more importantly – were steelworkers particularly vulnerable at the time to choose , to “no brainer” arguments. Stuart accepts the circumstantial arguments around the spike in transfers in late 2017 and early 2018 and plays down the argument that steelworkers are much different to any other workers
The distinguishing feature of BSPS is probably not the profile of the members by any measure, but the fact that they were all forced by the scheme’s closure to make some difficult and stressful decisions under the pressure of deadlines
The FCA point out in the press release to the announcement of the BSPS redress consultation that a redress scheme would be specific to BSPS which is “highly exceptional”.
A redress scheme would be limited to BSPS transfer advice. BSPS is a highly exceptional case with the FCA’s analysis indicating significantly more unsuitable advice (47%) than observed in reviews of higher-risk firms in non-BSPS cases (17%).
But I don’t think this can be taken as the FCA changing its mind on BSPS as Stuart seems to suggest in a recent tweet
There seems to be some divergence between professional assessment of transfer cases under past business reviews and FOS and FCA findings, even at BSPS. I think I understand why. It makes a consumer redress scheme counter-intuitively hard to justify.
How a redress scheme could address the problem Stuart identifies.
I agree that simply upping the cash payments to those who took transfers from BSPS is little more than a fine on good advisers and a hand-out to steelworkers. I agree it allows all who took a transfer to game the system and will annoy not just advisers and their insurers, but members in BSPS who stayed put. The situation is similar for those who did not contract out of Serps on a voluntary basis).
But I disagree with him that a redress scheme could not be established with “nuance”. By “nuance”, Stuart means that the scheme would only pick up those who genuinely needed and deserved redress – those who should not have transferred.
These are people who were bullied into transfers and now sufficiently regret that decision that they would rather be back in a scheme that paid them a wage for life, with inflation protection and without the worry of managing the drawdown of funds.
Such an option is now available due to the re-opening of BSPS to transfers-in (in November) and possible competition to make redress from commercial annuity providers and superfunds (where the risk would be shared with shareholders rather than employers).
Taking up redress to join or rejoin an arrangement offering a comparable benefit to that of membership of BSPS, would mean giving up the money in the SIPP and accepting that any drawdowns to date would reduce the redress on a transparent basis.
Redress would also mean giving up compensation for poor transfer advice and for ongoing advice and wealth management fees. This sounds harsh but it addresses the problems with payouts which have to date been distributed on an unfair basis. Better to start again.
Many, perhaps most steelworkers would not take such redress and it could be time limited to ensure closure on the extent of the liabilities. Those who have taken compensation and are happy with it, would of course be able to keep what they had been paid but would have no access to restitution beyond a published deadline,
This would mean that directly involved IFA businesses would know the extent of their liabilities to the redress scheme and those who had not conducted BSPS transfers would be able to plan for the future with an understanding of the impact of the scheme on future levies and PI premia.
I think that this is the right way to go and I am also keen that the NAO and the FCA properly address the wider context of the specific conditions surrounding Time to Choose. It is wrong to blame the problem just on advisers, much of the vulnerability that steelworkers experienced was about their jobs and working income , which they saw at risk from what they saw as uncaring and remote employers (Tata and British Steel).
The RAA protected those who had no need to worry about employment (pensioners) but left all the uncertainty with those still in employment. The most vulnerable members were those who were factory-gated.
The consequence of the RAA was to keep the transfer option on the table. Those who created the RAA and those who advised the trustees that there was not likely to be a transfer problem need to take some of the heat here .
Which is why I think the redress scheme, should be partially sponsored by Government funds, representing the responsibility it must take for the problems that persist.
So I differ from Stuart in thinking that a redress scheme should be offered, but only on the basis of full or partial restitution into BSPS or similar.
Speed is of the upmost…
I see the NAO wanting to report with urgency (their report is due in March) and I hope that the FCA are already modelling the various ways that a BSPS redress scheme might work.
Stuart’s paper should be essential reading as it properly explains the risks of getting a redress scheme wrong.
But I don’t think it fully looks at how a redress scheme could get it right. There we need input from those who could put it together and consent from those who would have to pay for it.
The bill for the failures at Port Talbot and Scunthorpe should not be on advisers like Stuart Fowler.
There are many arguments that recommendations against the transfers should have been made for many steelworkers. The fact they were not experienced investors and sophisticated financially, the fact they were vulnerable, the fact that some of the “bad” warnings where not that clear etc.
This is what led for COBS 19.1 rules to change so much in the last few years, and good they changed as people are better protected, number of transfers went down etc.
The problem regarding FSCS compensation which as an advisor we would have to pay on BSPS is that we are asked to pay more than what is fair. The BSPS1 scheme escaped the PPF with a 91% or 92% valuation, and if I am correct BSPS2 has a valuation of around 95% of the cost of deferred annuities cost. If TSUK fails into administration today, this is the level of BSPS2 pensions that could be secured with the existing investments.
Ourselves we are asked to pay compensation at 100% cost of BSPS2 for deferred annuities. I do not think this is correct.
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Your point re weakening of the pension promise translates doesn’t just apply to the fairness of the redress calculation, Eugen (harming all of: adviser firms, PI underwriters and FSCS levy payers). It also affects the finding of fault, on which any liability to pay redress depends. Hence it is vital any consumer redress scheme can assess the trade-off made by the scheme member taking into account the impairment of the pension promise you refer to and the implications for the risk of shortfall in real (after inflation) income. This is not apparently happening with FOS, s166, or Past Business Reviews. Why will it be different with a s404 redress scheme, particularly if the intention is to make it ‘simpler’ to decide?
If (as Henry has suggested) the redress calculation can be made less onerous by linking to a return to an impaired scheme, that may deal with the gaming issue I raised in my article. But it will not deal with the suitability tests on which redress depends – except in cases so extreme as to need no judgement of the trade off made. But the high level of FOS findings to date, and the impasse between the FCA and external assessment of the same cases under past business reviews, together imply that the possibility of a trade off is not even being admitted.