The FCA has published its proposed redress scheme for steelworkers but it looks like the compensation will cost £49m rather than the estimated £71m earlier this year. The new compensation levels are now estimated to average £45,000 (down from £60,000) reflecting a dramatic fall in annuity prices. 300 potential claimants earlier in the year, are likely to get nothing. Claims are estimated to be payable to 1000 rather than 1300 steelworkers
This blog is for the steelworkers who may be puzzling over how a year which has seen prices for their shopping and energy bills soar, compensation for an event now over five years gone – can plummet.
It doesn’t contain fancy charts or pictures of hardened steelworkers, it contains words which I hope make some sense out of what seems nonsense.
What steelworkers get is based on the timing of the compensation calculation
To understand the FCA’s formula for compensation, you need to understand how transfer values are calculated. The dramatic change in compensation is governed by precisely the same seemingly arbitrary forces that brought down Liz Truss’ and Kwasi Karteng’s “Growth Plan” and brought Sunak and Hunt to Downing Street.
It’s helpful that my friends at Hymans Robertson, an actuary keen to share information on this complicated subject, have this week published a study of just what is going on to transfer values.
It shows how – when interest rates move up and down a lot (called volatility) , transfer values just don’t reflect the true cost to the scheme paying them. That’s because transfer values are calculated on a specific day but are valid for three months. Pick the right day and the scheme wins, pick the wrong day and the member wins. Transfer values are open to gaming.
Now transfer that logic to the compensation system. Advisers can pick the day they make their compensation calculation and can game the system to choose the time when annuity rates are highest , to depress compensation. The higher the annuity rate, the less money needed to meet the shortfall between what your SIPP can buy and what was given up.
Hymans have even issues scheme trustees with a bullet point plan to protect trustees from being gamed. What help is their for steelworkers?
When Steelworkers get compensation is up to the IFA
The BSPS redress system is based on the IFA who caused the problem doing the calculations. Here is how the Financial Times explains when steelworkers are likely to get their compo.
In its final rules for a redress scheme for BSPS members who received unsuitable advice, published today (November 28), the FCA said consumers should be contacted by their adviser between February 28, and March 28, 2023, with advice being reviewed by the end of September 2023.
Those opting to receive redress as a payment into their pension should receive their calculation by February 2024.
Many steelworkers will consider this an unacceptable delay, but – in the light of what I have written, they may also be worried about the wide window this gives those calculating the compensation to make the offer on terms that benefit advisers most.
Far from protecting members, the redress scheme seems to be a charter that allows them to be compensated on terms decided by those at fault.
Why this is so arse about tit.
The business of valuing a pension , whether as a transfer value from a DB scheme or as an annuity (a pension you buy with your SIPP pot), is complicated and makes little sense to ordinary people. It links the value of the income you can expect in future to the cost of Government borrowing (the gilt rate). The gilt rate is also known as the risk free rate but it is anything but risk free when it swings about as it has done this year and may do for some time to come.
Steelworker’s compensation is linked to the gilt rate and that is decided quite independently of how your pension pot grows or falls. Annuity rates are now much higher than they were at the start of the year but they are lower than they were a month ago, just because of the markets feeling more confident in one Government than another.
By way of example, if an adviser chose a calculation date at the end of September, a steelworker will be compensated when £100,000 could buy a 65 year old an annuity of £7,608 pa, just before the time to choose, that £100,000 would only have bought £4696 pa. That would be equal to a 30% loss in compensation.
Steelworkers are entitled to ask just why compensation for the bad advice they received in 2017 should be subject to the gilt rate in 2023 or even 2024.
Things are so arse about tit because pensions have got themselves into an unholy mess about how they value benefits and because annuities and pensions share a common addiction to the “risk free rate” of gilts.
It is true that the high transfer values of 2017 and 2018 which led to so many steelworkers choosing to transfer benefits to SIPPs , seemed a windfall. But it was only a windfall because BSPS moved away from valuing benefits against the return achieved on the assets of the scheme to using the much lower gilts based discount rate. Arguably, if the basis of valuation had not changed early in 2017 , the majority of transfers would never have gone ahead. The reason for the switch to gilt based rates is another matter and one I haven’t got time to go into now.
Such swings in transfer, annuity and compensation values appear – and to me are – totally arbitrary. They do not reflect the true nature of things – they are an “actuarial construct”.
So gilts based valuations have a lot to answer for and will continue to be a cause of controversy and distress for steelworkers for years to come.
The purpose of compensation is to put someone back into the position that they would have been in if the wrong hadn’t happened. So whenever the calculation happens the sum of the personal pension and the compensation should provide the same pension as the original scheme. The fact that the compensation is lower is simply the result of it costing less to buy the same pension after gilt yields have risen.