Conversation with IFA about DB transfer

bostonerimus

dunstonh wrote: »

Govt doesnt have the budget to pay for it. Employer will pass costs on to consumers. Taking it from the pension is an option that already exists and the one that most use when paying for advice.

The I imagine the cost of a little education would be far less than the fees advisers charge and that education would pay dividends in sound financial decisions in the future. Why doesn't everyone support some financial education, particularly prior to a DB to DC transfer?

Being forced to go on a course for about a week (as that it what it would take for a low level amount of knowledge required to a consumer level) is the same.

The course could be taken over a number of weeks and of course there's web based learning too. The vital difference between paying for some education and paying for an advisor should be obvious. The result of the first is a knowledgeable consumer taking responsibility for their decisions, the other just compounds the strange distance that exists between many people and their finances,

Linton

bostonerimus wrote: »

For most people the required financial management knowledge can fit of the back of an index card. People are smart if things are explained well and can make their own decisions. This is surely the idea behind the pension reforms......or were they just a way for the finance industry to get at the DB pots of people that they want to keep dumb and discourage from taking responsibility for their own money.

You have previously told us that your investments are relatively unimportant for your retirement and that you have a decent DB pension which couldn't be transferred to a DC pot. Perhaps your attitudes would be different if your only income beyond state provision was a large lump sum which had to last you from retirement to death.

Your belief that the reforms were a way for the finance industry to get at DB pots shows some ignorance of what actually happened. Transfer to a DC pension isn't new, it has been possible for many years. The key factors that have changed are:

A - until the collapse in interest rates and the pension industry having to manage the effects of increased longevity transferring would have been clearly a very foolish thing to do except under special circumstances.
B - until the DC reforms were brought in a transferor would have been forced to buy an annuity. A guaranteed steady income appears to be inherently much less attractive to many non-financially educated people than a pot of several £100Ks, more money than they have ever had in their lives.

So no recent major changes to the DB pension rules at all, except for the requirement that transferring requires that the person who wants to transfer is provided with the necessary personalised information on which to base their decision. Which all seems very reasonable to me.

bostonerimus

Linton wrote: »

You have previously told us that your investments are relatively unimportant for your retirement and that you have a decent DB pension which couldn't be transferred to a DC pot. Perhaps your attitudes would be different if your only income beyond state provision was a large lump sum which had to last you from retirement to death.

Just before I retired I took advantage of a bizarre opportunity to transfer a 10 year accumulation in a DC pot to my employer's DB plan, I was 53 years old and $280k bought me a $20k index linked pension starting at age 55. I also took a small $35k CETV from another ex-employer's DB plan and put it into a DC account. It is true that I don't need my other investments, or indeed either US or UK state pensions, for retirement income, so I am still in the accumulation mode so I emphasize capital gains more than most retirees.

Your belief that the reforms were a way for the finance industry to get at DB pots shows some ignorance of what actually happened. Transfer to a DC pension isn't new, it has been possible for many years. The key factors that have changed are:

A - until the collapse in interest rates and the pension industry having to manage the effects of increased longevity transferring would have been clearly a very foolish thing to do except under special circumstances.
B - until the DC reforms were brought in a transferor would have been forced to buy an annuity. A guaranteed steady income appears to be inherently much less attractive to many non-financially educated people than a pot of several £100Ks, more money than they have ever had in their lives.

So no recent major changes to the DB pension rules at all, except for the requirement that transferring requires that the person who wants to transfer is provided with the necessary personalised information on which to base their decision. Which all seems very reasonable to me.

I think B might be wrong for large pension pots drawdown was an option before the reforms. I have no problem in getting people information, it's holding the transfer hostage to the say so of an advisor and having many then sell their often worthless on gong services. I suppose this is a slight improvement of some people being required to purchase an annuity, but it still smells of the old paternalistic and condescending attitude that many people in government and the financial service industry has towards people and their money.

jamesd

There was a major practical change just two years ago when it was made far easier to transfer without the agreement of an adviser. previously it was difficult in practice to do a transfer without the adviser saying it was a good idea, now all that is needed is getting advice, not following it.

B of course is an insult to those who have ample reason to carry out a transfer that at present is likely to provide a major positive change to their lives, providing a higher income at an earlier age than they had thought possible, and one better aligned to the usual need to have a higher income from the pot from retirement to state pension age, when the state pension supplants part of the income. A sole guaranteed unchanging income is not a proper solution to this financial problem because it's a mismatch between income needed and income provided.

Linton

jamesd wrote: »

There was a major practical change just two years ago when it was made far easier to transfer without the agreement of an adviser. previously it was difficult in practice to do a transfer without the adviser saying it was a good idea, now all that is needed is getting advice, not following it

B of course is an insult to those who have ample reason to carry out a transfer that at present is likely to provide a major positive change to their lives, providing a higher income at an earlier age than they had thought possible, and one better aligned to the usual need to have a higher income from the pot from retirement to state pension age, when the state pension supplants part of the income. A sole guaranteed unchanging income is not a proper solution to this financial problem because it's a mismatch between income needed and income provided.

The practical change you mentioned was an ill considered side effect. Not a policy.

Of course there are people who are perfectly capable of working out the details of a retirement plan and coming to a valid conclusion that a transfer would be in their best interests, and then would be able to manage their finances to achieve their objective.

However I would contend this would not apply to the majority of people. The vast majority are rather more likely to be bowled over by the possibility of having £100Ks of money, far beyond any lump sum that have ever owned in their lives. They would never have previously invested except possibly in the default funds of another employers DC pension and almost certainly would not begin to understand or be able to apply:

1. Use Guyton and Klinger's decision rules
2. Use Guyton's sequence of return risk taming (adds about 1% of pot size to withdrawal rate)
etc etc

Yet you have made clear in the past that without such techniques the drawdown amount will be much diminished.

So what should the government do? Have an exam to separate out those who can from those who cant?

What they have done is to insist that people receive personalised advice appropriate to their circumstances. And then let them make their own decision. What else would you suggest?

Now who is available to give that advice? They either use an existing profession or they create a new one perhaps in the same way as they created the job of surveying houses for energy ratings. They chose to use an existing profession who already should have the skills required. Would you do anything different? As to cost - who should pay? The transferee or everybody else?

We can now look at the situation from the IFAs point of view. They are being asked to provide advice knowing that they could be held personally responsible should things not work out. Would you have made your recommendations on that basis? What would you have charged? Might you have concluded that you could only make a positive recommendation if you could supervise the application of Guyton & Klinger etc?

Finally we can consider the position of the pension companies. I am rather surprised that any reputable one would be prepared to accept a transfer-in without a positive recommendation unless they were very confident that they would not be the subject of a mis-selling case in a decade or two's time. It seems unclear whether such confidence will be justified.

So my conclusion is that everyone has acted reasonably given the inadequately thought-through situation the government created when providing the pension freedoms. Much better in my view to have the US system whereby DB transfer is impossible except under very limited circumstances.

OK it wouldnt be optimal for everyone, no pension scheme is. An employer has no obligation to provide a pension scheme that is optimal for everyone, it would be totally impractical to do so. The best that can be done is to provide a generally applicable one which the employee can accept or not. There are other means such as S&S ISAs or private pensions which enable an employee who requires such tweaks as a variable income over his/her lifetime to make their own arrangements.

bostonerimus

Linton wrote: »

However I would contend this would not apply to the majority of people. The vast majority are rather more likely to be bowled over by the possibility of having £100Ks of money, far beyond any lump sum that have ever owned in their lives. They would never have previously invested except possibly in the default funds of another employers DC pension and almost certainly would not begin to understand or be able to apply:
.

This is the "lamborghini" opinion which I think is wrong. Most people realize that they can't go out and spend their pot and that they need to make it last. There are some pretty simple principles that most people can follow to make that happen. There are many vested interests in making this seem more complicated than it needs to be.

bostonerimus

Linton wrote: »

Much better in my view to have the US system whereby DB transfer is impossible except under very limited circumstances.

I agree. In the US an employee cannot initiate a DB plan cash out. I can be done by the pension plan itself by satisfying strict IRS regulations. It is done when DB plans are replaced by DC plans and sometimes offered on small balances.

The freedom to cash out a DB plan is destabilizing and that's compounded by the ridiculously large CETVs being quoted......seriously I think discount rates of <1% are being used.

Linton

bostonerimus wrote: »

This is the "lamborghini" opinion which I think is wrong. Most people realize that they can't go out and spend their pot and that they need to make it last. There are some pretty simple principles that most people can follow to make that happen. There are many vested interests in making this seem more complicated than it needs to be.

It's not the Lamborghini argument. The problem I see is that most people wouldn't know how to make the money last and also would not be happy with the level of volaility that would be necessary to outperform the DB pension they were giving up. I suspect that without hand holding from a trusted IFA most would be more than happy to keep it in cash or close to cash and simply withdraw from capital. By the time they realise they are in trouble it will be far too late to do anything about it.

Perhaps the best answer would be for the finance industry to develop straightforward off the shelf drawdown management products but as far as I know there aren't any yet. I suspect they will come.

sandsy

bostonerimus wrote: »

seriously I think discount rates of <1% are being used.

I think that's extremely unlikely, given the overall requirements for calculating CETVs laid down in legislation and by the pensions regulator.

It's more likely that there's specific features of the scheme or individual's benefits in the scheme which are skewing the calculation of the CETV calculation relative to the majority of schemes.

bostonerimus

Linton wrote: »

It's not the Lamborghini argument. The problem I see is that most people wouldn't know how to make the money last and also would not be happy with the level of volaility that would be necessary to outperform the DB pension they were giving up. I suspect that without hand holding from a trusted IFA most would be more than happy to keep it in cash or close to cash and simply withdraw from capital. By the time they realise they are in trouble it will be far too late to do anything about it.

Perhaps the best answer would be for the finance industry to develop straightforward off the shelf drawdown management products but as far as I know there aren't any yet. I suspect they will come.

I'm a little more optimistic about people being able to manage their money. I think off the shelf products and simple solutions will become increasingly available and will hopefully be less expensive than and IFA. Some people will always want or need detailed advice for complex situations, but far too many DB transfers and being hit by 2% or 3% IFA fees and then ongoing charges when they really aren't necessary.