The advisers have left the house, some have seen their businesses grow as they responsibly advised clients on taking sky-high transfer values, some are struggling with insurers and the FIS to keep their business afloat – as claims arise. Some advisory firms are no more – unable to meet claims
Hard earned permissions to transfer have been handed back. The days of clients being able to pay for advice from their newly created pots have passed. Though theoretically – the attractions of taking a transfer remain the same, the lure of big pots is over; transfer values are only half of what they were
LCP told Professional Pensions that transfer values have dropped from around £250,000 at the beginning of 2022 (for a member aged 55 with a pension of £10,000 per year from 65) to around £130,000 now. This drop reflects a rise in gilt yields.
Here is the question; why did some transfer values top 40 times the projected annual pension?
The answer is simple, if gilt yields rise, the “present value” of liabilities falls. If the gilt yield doubles , the transfer value halves.
But the present value of the liabilities is an actuarial concept, used to measure surpluses and deficits at scheme level. The application of the concept to individual transfer values has given rise to the wild fluctuations in Transfer Values, mentioned by LCP above.
Someone who applies for CETV and is quoted £250,000 at the beginning of 2022, will be mystified if he/she gets a second quote 20 months later to find the number is £130,000.
And this blog is full of hard luck stories of people who feel they missed the boat. But the truth is that they have missed nothing. They have the same pension promise today as they had at the beginning of 2022. There may be a marginal improvement in the quality of the promise but that is of little matter, any scheme valuing on high multiples of salary had a very prudent valuation basis.
The hard luck story is not about the failure to get out, but the cost to schemes of meeting inflated Transfer Value payments.
Of all the pernicious impacts resulting from the tyranny of the gilts + discount rate, the inflation of transfer values at a time of quantitative easing seems the worst. The most egregious case – the £7bn that flew out the door at BSPS, followed a massive hike in transfer values as BSPS de-risked and lowered the discount rate early in 2017. The rush for the door was pretty well universal. In 2017 , £34.2 bn. was transferred out of corporate DB pension schemes , almost entirely into wealth management programs.
The acceleration of pension transfers from 2012 -2017 (see below) reflected more than just the decline in discount rates. Conditional Charging, Pension Freedoms and the increased sophistication of advisers post RDR all contributed. But the ONS numbers below show just what an impact CETVs made on the shape of ‘retirement wealth’.
So what is wrong with that?
The stock of wealth in our DB plans has been massively depleted. The most obvious loss was in 2022 when falls in bonds and equities, created losses compounded by the fire-sale at the time of the LDI crisis. The less obvious loss was the process – described as “de-risking” which saw billions of assets lost to pension schemes through cash equivalent transfer values. Some of these transfers were further incentivized by employers desperate to get liabilities off their balance sheets.
All this money is now largely lost to productive investment, it sits in the wealth management sector and is not readily applicable to the productive financing of the UK economy. The de-risking of British pension schemes has meant that there is now insufficient investable capital in them, to warrant a growth strategy. Most DB schemes are now preparing for buy-out, having given up on paying their member pensions.
In my view , the failure of DB schemes to carry on and fulfill their function was in part, attributable to the sky-high transfer values calculated using rock-bottom discount rates. Neither the highs or lows were necessary, CETVs are a poor representation of the true value of the promise and if the actuarial profession comes to look at the causes of the demise of corporate DB pensions, they should write a chapter of the book on the ridiculous calculation of transfer values over the past 20 years.
