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.
