I have been lying awake worrying about several pensions I know that are in an “end-game” that will lead them to firstly buy-in of annuities and then “buy-out” of the scheme by an insurance company with a “buy-out”. Such is the weight of opinion that ridding employers of their pension liabilities that there is little opposition from those whose pensions are to be swapped for promises from an insurance company.
My mind goes back to the early days of the mania for Defined Benefit transfers , let’s put an arbitrary date of 2015. Organisations such as Tideway had created a compelling case for “CETVs” by making them free for people with defined benefit pensions to transfer to wealth management programs, the “free” was of course nothing of the sort, the cost of the operation was simply born by the money transferred which became an ongoing source of income for the wealth manager. This started as a program for the wealthy who would , for a range of reasons, prefer “wealth” to pension , but ended with disastrous transfers away from pensions , the most notorious of which was at Scunthorpe and Port Talbot.
We know the transfers from the British Steel Pension Scheme as a breakdown of good advice and its replacement by appalling behaviour by regulated advisers. I know because thanks to Al Rush I was witness, so was the BBC and the FT. It took the FCA a year till they had cottoned on to what was happening and it took Frank Field and his parliamentary group to show up their lethargy.
I bring it up, because it was the similarity between the failures with BSPS and other pension schemes and what appears to be going on with similarly well funded pensions today.
The seeming healthy state of pension schemes has led many companies to demand that their trustees release members from their fiduciary management and deliver the pensions to third parties. The third parties are not wealth managers but insurance companies but transfers are being made with equally little questioning of whether it is in the member’s long term interest. To buy out, a pension scheme needs to meet not just the buy-out price but the substantial costs of the transfer in terms of advisory fees. Much of this can – as with previous transfers, be borne by the fund and of course the transfers to insurers are meticulously within the regulations both for pension schemes and insurers. They have advantages to companies in terms of what shows on the balance sheets, everyone is a winner except….
Except that the cost of buy-out is born out of surplus funds to the need to run the scheme (known as technical provisions) and the question of who owns that surplus is conveniently being ignored in many cases with no discussion with deferred and active pensioners who might be beneficiaries of surplus paid to them. For instance they could get full inflation protection in years when inflation is high. While pension funds have trustees whose responsibility is to members to do what’s best for them, annuities are managed by insurance company who have no such obligation.
There are of course cases where annuities can be a better bet (for instance were a pension to go into the PPF because the sponsor can no longer afford it). There were also many cases where CETVs were taken rightly by people better suited by them. But many of the transfers that happened at Port Talbot and Scunthorpe should not have happened and there was no proper documentation from advisers to suggest they paid any interest for the member.
There is supposed to be an obligation on advisers involved with bulk transfers of members from pensions to annuities to explain the advice. This is known as TAS 300 and it is part of the internal regulations of the Institute and Faculty of Actuaries, I have written about it before so to summarise it is supposed to explain why (in such cases) a transfer is in the general interest, this has to include the interests of members. In the DWP’s response to questions from the Work and Pensions Committee makes its clear that it is concerned that surpluses are paid not just to advisers and back to sponsors but to members.
In my view there is insufficient attention being paid to the needs of members when buy-ins and then buy-outs are happening and I suspect that as with CETV transfers, the questions will too often arise after the transfer has happened. Though an institutional transfer of members benefits from a pension to an annuity may seem different to the taking of a CETV from a pension to a SIPP, the impact may be the same, a loss of a defined benefit with unconsidered upside to members.
I didn’t sleep much for the second part of last night and am still feeling concerned. This isn’t a nightmare, it is for real. Last year over £50bn transferred into annuities from DB plans in the name of “de-risking”. At some point, a consumer body, be it media, regulator, union or Government will ask very real questions about the benefit of bulk purchase annuities. I have been there once and I sense we are getting there again.
Advisers ought to be paying a lot of attention to producing TAS 300 reports and sponsors and trustees should be paying a lot of attention to what they say. Otherwise consumer bodies – arguing for the side of members – will come back to bite them.
Dammed if you do dammed if you don’t.
Imagine for a moment that you are an IFA faced with this situation
When a TV value for a couple is greater than the sum of all future income ignoring any future return on the capital and twice the sum of future spouse benefits again ignoring any future return on the capital.
Looked at another way the TV is 45 times the promised income to the member next year. should you advise the client to secure that position and transfer?
With the benefit of hindsight knowing what the TV on the same couple today and should they sue the IFA for the loss. of £800,000.
Is it commercially sensible to accept a fee of £2000 to give the advice and risk bankruptcy?
Putting the funds into a high risk fund paying £150,000 to the IFA that is now worthless us another matter
“… Except that the cost of buy-out is born out of surplus funds to the need to run the scheme (known as technical provisions) and the question of who owns that surplus is conveniently being ignored in many cases with no discussion with deferred and active pensioners who might be beneficiaries of surplus paid to them. …”
In the states, the surplus belongs to the plan, at the discretion of the plan sponsor (the settlor function, not the fiduciary function), and once all liabilities are satisfied, it can revert to the plan sponsor, subject to a 50% reversion tax.
Most avoid that option, and instead transfer the excess to a Qualified Replacement Plan (subject to a 20% excise tax), provide a pro-rate benefit increase, or simply allocate all of the excess assets among participants in a nondiscriminatory way.
I suppose it matters who you are acting for. Faced with the beneficies options and advising the individual not the scheme the dilema is as described.
When it comes to employer-sponsored plans, I always, and only, write from the plan sponsor perspective.
My only “claim to fame” from 45+ years of professional experience in corporate employee benefits is the ability to develop and facilitate retirement benefits that are mutually beneficial to both the plan sponsor and the participant.
In the states, when it comes to defined benefit pension plans, the promised benefit (based on the formula, eligibility, vesting provisions, etc.) is what belongs to the vested participant. The funding surplus or deficiency belongs to the plan sponsor, subject to taxes on reversions, and the PBGC insurance premium typically paid by the plan sponsor covers only a portion of accrued benefits in plans that are terminated with insufficient funds.
Unfortunately, until the Pension Protection Act of 2006, the plan sponsor was not always able to properly fund the defined benefit pension plan because of tax code limits on tax deductible contributions. Before the PPA, the combined limit for total contributions to all plans for a year was the greater of (1) 25 percent of compensation, or (2) the amount necessary to meet the defined benefit plan’s minimum funding requirements for the year, but not less than the plan’s unfunded current liability. PPA 2006 loosened the contribution limits on single employer plans, but, by then, there were many more DB plans that were terminated or frozen.
Congress has never adopted a national retirement policy. President Carter proposed MUPS – but that didn’t happen. We do have tax or revenue strategies regarding retirement benefits – where benefits are often a secondary consideration.