Is Nikhil Rathi saying “a pension is better than a pot?”

I love retro “cut and paste”, especially when it is from one of our most digitally advanced journalists. Jo is clearly keen to make the point that there is a serious flaw in the FCA’s £71m redress plan for BSPS , the flaw is that the real cost of redress is up to eight times higher (£568m). So – from micro-blog to the vasty fields of here is the full version! 3 lucky readers can read Jo’s article on this free link.

Of course it is always somebody else’s fault and the rapid staff turnover at the FCA means that whoever took decisions in 2017 will not be held responsible for what happens in 2022.

This particularly applies to leadership who presumably will be no more accountable in 2027 for the decisions they take today. Which is why it is important that they are held to account today rather than in five years time.

Holding regulators to account

I agree with the import of this tweet, regulatory failure is paid for by higher FSCS fees which are passed on to the consumer through higher charges. I am not speaking in abstract terms, I pay these fees running an FCA regulated firm and pay for them in my annual charges to those who manage my money.

As a “consumer”, I am entitled to expect better and having the “bully pulpit” of a well read blog, I hope that I marshal some weight of opinion that gets listened to.

So I will say this again , and for the nth time. The situation that happened with BSPS was not a result of the pension freedoms but to do with a failure by TPR, FCA and the Trustees of BSPS, to understand that many members had just had enough of Tata and wanted out. This statement by the FCA CEO is simply wrong.

He [Nikhil Rathi]suggested that the FCA’s job was made tougher by the “rapid” introduction of pension freedom reforms, instigated by the Treasury in 2014, which made pension transfers more attractive when the regulator’s view was that this option was not suitable for most.

It is not right to blame pension freedoms, we had a pension transfer problem before pension freedoms and we will continue to have problems with pensions so long as we have a private pension system that promotes retirement wealth over retirement income.

My small amount of time in Port Talbot impressed on me just how little regard is given by everyday people to their long-term financial need for income and how easily they can be swayed by arguments that holding capital in wealth management means the nastiest hardest problem in finance has been sorted. It hasn’t, it comes back to bite you twice as hard when you discover that your wealth is finite while the income you gave up lasts as long as you do – and if you have a partner or spouse, maybe longer!

Perhaps that is what is meant by Rathi’s cryptic statement that the transfer option “was not suitable for most”. If that is what he is saying let him say it. The FCA should be clearer and saying that for most people a pension is better than a pot.

I believe that a pot is mysterious and alluring until you find it is empty, when the income it was supposed to produce runs out and you are left on state pension and (if you claim it) pension credit. We built a private pension system in this country which we have been busy dismantling through the various de-risking initiatives that have enriched the wealth management industry beyond measure.

It is now time for Nikhil Rathi and the FCA to accept that what we he is  left with (the investment pathways) are not fit for the purpose of providing second tier pensions. We need to build back better – with proper pension products that offer people better rates by being invested productively, that use the tried and tested means of longevity protection – longevity pooling – and which are promoted by a regulatory system that supports the policy initiatives of the Department of Work and Pensions.


Nikhil Rathi

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Is Nikhil Rathi saying “a pension is better than a pot?”

  1. Mark Meldon says:

    Yup, a pension is better than a pot, that’s for sure (unless you are really poorly, of course). I have been an IFA for 32+ years, and it’s the hardest time of all right now when trying to find that little word “income” for clients. I think that a big wave of crisis is now breaking on the shores.

  2. John Mather says:

    Not trying to top your experience Mark but my 50 years and an IFA let me see the way DB was miss sold in the 70’s with providers competing on funding rate for the business. i.e. who would do it the cheapest? and uplifted 60ths for the senior management and governance people as a bribe to get the case.

    The real issue, rip off number one, is the mis selling of DB. Look at the number of failed schemes and most remaining schemes looking to sell off the risk to an institution with a life expectancy greater that the “Guaranteeing” host employer.

    Taking a TV greater than the value of the sum of the expected payments would seem like a good deal but then no scheme could do this for all members, So we need regulation to nudge the option of transfer into the long grass. Plus the withdrawal of PI for advising firms

    The selective quoting from reports only demonstrated the confirmational bias and lack of objectivity exhibited by the voyeurs of the Pensions world.

    The TV should be separated from the advice on funds chosen to hold the money going forward. That is where the secondary rip off happened for which there is no defence.

    • Stuart Fowler says:

      Is the TV really greater than the sum of the parts (by which I assume you mean the PV of the cash flows generated)? It’s a calculation of the PV that reflects the underlying assets, which may be risk free or risky or a combination. The only difference between the expected cash flows with transfer is that the asset preference may be for more risky and less risk free than the scheme’s preference. It’s not a ‘free lunch’, or a risk free arbitrage, but a difference in risk preferences.

      The demand for transfer expanded independently of Pension Freedoms because (by the time of Time to Choose) ILGs yielded -1.7%. Even at a high level of confidence a long-duration drawdown plan holding some risky assets was likely to generate higher real cash flows than the DB. The only question then is how many people are in a position to take advantage of this opportunity. Who is to be excluded?

      Many people with a paternalistic bent want to exclude members of the BS scheme. Is that really doing them a favour? In their case, the risk of lower real cash flows even with moderate risk was even further reduced by the impairment of their inflation protection. In fact, cumulative inflation since 2017 above the applicable caps has (in our modelling) eliminated all the ex ante risk of shortfall. And on the basis of marginal utility they stood to gain more than affluent people from even modest upside in spending.

      This has two important implications. First, the evidence of widespread losses at BSPS is probably flawed. Second, individual cases of willingness and ability to take investment risk, given the choice between that and inflation risk, is very hard to establish after the event. It’s nuanced and cannot be assessed from files alone. The FCA’s DBAAT form for file assessment isn’t fit for this purpose. As well as applying hindsight to the the applicable rules it even excludes any boxes to record the critical calculation of drawdown cash flows.

      FOS is similarly biased, even though it isn’t obliged to use the DBAAT form. It keeps ruling on BSPS cases on the basis of a prior assumption the critical yield should be the one based on an annuity at NRA not drawdown. They fit the test to the answer they want.

      This is heading where it belongs: the courts.

  3. Mark Meldon says:

    I didn’t wish to be controversial! What I would say however – as an IFA that dropped DB Transfer permissions a year or so back, like many others, after a regulatory ‘nudge’ and very high PII costs- is that whilst we in the profession may have a good understanding of the issues raised by Mr Mather and Mr Fowler, that just isn’t the case with the overwhelming majority of ‘end consumers’ who, in my experience, place great value on ‘income streams’ as they get older and have limited appreciation of investment risk and costs as their cognitive ability gradually declines ( this happens to most of us). Everything needs to be seen in context, of course, and we will agree, I’m sure, that everything is expensive nowadays, especially ‘real annuities’, linked to the RPI.

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