Defined Benefit transfer recommendations - Media article

DairyQueen

Excellent post. Thanks for lifting the lid.

MarkCarnage wrote: »

One point not covered in this debate is the probability and more importantly the time horizon of that probability, of return outcome between a predominantly equity portfolio and index linked gilts (as a proxy for DB pension outcomes). That requires some high level modelling assumptions clearly, but what has happened in recent years is that the break even time horizon for that 95% probability figure of a global equity portfolio outperforming ILGs has fallen very considerably, from perhaps 25-30 years to below 10 years. Lots of reasons for this, but the key takeaway is that you would have to be very risk averse for it not to work in many cases. The above is also being generous in that the ILG portfoio is based on uncapped RPI not capped CPI which many schemes now offer. The situation in recent years has in large part been created by regulatory constraints on many institutional market participants, including DB pension funds. It is a QE induced distortion, which regulatory models assume will persist indefinitely.

The impact of QE is barely covered by the mass media. I guess it makes for less than exciting reading. However, the impact on savings generally, and on retirement income in particular (capped-inflation DBs/annuities/investment-grade bonds), has created an environment in which many choosing safety - short or long-term - are guaranteed to be punished by inflation.

The impact on retirement income over the long-term can't be overstated. The additional risk/cost of safety is not yet appreciated by the mainstream. Indeed, as the OP points-out, many DB scheme members are unaware of the inflation-risk associated with their pensions. GMP, in particular, is an issue that IMO is likely to be more contentious than the current hoo-ha over DB transfers. Over time, and particularly when inflation rises above 3%, the 2016 pension changes will really start to bite.

MarkCarnage wrote: »

In my own case, I've retained my largest DB pension, as I see it as the bedrock 'annuity' of my retirement income

My OH has taken the same approach. His DB pension has no GMP component and is inflation-proofed up to 5% in its entirety. This is better protection than many DBs offered by the private sector. We are very fortunate.

In contrast, the long-term value of my DB (considered gold-plated at the time it was accrued), had been eroded by the events of the last decade. Once in payment, the GMP component was guaranteed to lose value, and the discretionary increases on the 'excess' had been fully exploited by the company in an attempt to contain costs.

Hobson's choice:
1) Safety and no effort, with the guarantee of income losing value (equivalent of a level annuity)
2) Risk and effort, with the only possibility of matching/beating inflation available in the current climate.

MarkCarnage wrote: »

I am very glad I made the move when I did (2016) as I fear it would be a much harder exercise now, mainly for all the wrong reasons,

Same here. I transferred in 2017.

The offer to transfer catalysed the need to research the scheme detail. I would otherwise have been sleep-walking into a retirement income which I had falsely assumed was fully inflation-protected. Nor was it a good fit for our tax and other circumstances.

MarkCarnage wrote: »

The FCA appear to want to outlaw DB transfers by the back door rather than having the 'cojones' to admit that they just want to stop it. Decisions like allowing retrospective challenges of 'insistent client' transactions make me despair of them. They should have been adopting a much more targeted, risk based assessment of poor transfer advice than appears to have been the case.

Agree. The quality of advice is key. However, the complexity of the issues is such that I don't underestimate the difficulty of communicating the pros/cons to the ill-informed (i.e. the vast majority).

With every major decision in life, it is incumbent on individuals to take responsibility for the consequences. Buyer beware. At the very least, examine the DB scheme with a fine-tooth comb. Understand the benefits. IFAs are able to advise and guide but If we want choice then we must also accept responsibility for the choices that we make.

Joey_Soap

Am I the only one thinks -

Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market.

That is rather a low bar to set?

Joey_Soap

I do rather think there has been too many DB > DC transfers, some of the cash value transfer amounts are mind boggling and I suspect, irresistable to many poeple, understandably so.


A simple example though - Mrs Soap has a DB pension in payment now of about £10k a year. Linked to RPI or 5% whichever is lower. Widowers benefit is 50% of that. Not that long ago, she was offered a 33x pension transfer, £330,000 or thereabouts. Sounds a lot. But when you think, using the 4% rule as a guide, she could perhaps draw around £12k a year income. Now, that's only £2k a year more than the DB scheme is paying. And there's no RPI/5% linkage etc.... Yes, widowers benefit would be 100% of the DC pot. But the next market set back is likely to see 30 or 40% of the pot evaporate. And with it, much of the drawdown income. The DB > DC transfer really made no sense, yet the 33x transfer value seemed like a good deal on the surface.


My gut feel is that there's too many DB > DC transfers presently and the whole thing could blow up as the next mis-selling scandal.

DBdoobydoo

Joey_Soap wrote: »

I do rather think there has been too many DB > DC transfers, some of the cash value transfer amounts are mind boggling and I suspect, irresistable to many poeple, understandably so.


A simple example though - Mrs Soap has a DB pension in payment now of about £10k a year. Linked to RPI or 5% whichever is lower. Widowers benefit is 50% of that. Not that long ago, she was offered a 33x pension transfer, £330,000 or thereabouts. Sounds a lot. But when you think, using the 4% rule as a guide, she could perhaps draw around £12k a year income. Now, that's only £2k a year more than the DB scheme is paying. And there's no RPI/5% linkage etc.... Yes, widowers benefit would be 100% of the DC pot. But the next market set back is likely to see 30 or 40% of the pot evaporate. And with it, much of the drawdown income. The DB > DC transfer really made no sense, yet the 33x transfer value seemed like a good deal on the surface.

Was Mrs S offered the £330K CETV since she started drawing her pension?

My situation is that I have a DB pension of £10K that is not index-linked while the widow's pension is 60%. When I started drawing it in 2012 there was no option to transfer out to a SIPP & now it's worth about 16% less in real terms. I would love to be able to transfer out what is left as even with the safest of investments I think that I can do better than a flatlined pension forever decreasing in real terms.

BTW 4% of £330K is £13.2K

Malthusian

MarkCarnage wrote: »

I would definitely agree that for the whole universe, the figure is likely to be well below 50% and probably closer to 10%. However, as the replies to this thread demonstrate, there are a number of circumstances where it is likely to be a worthwhile option. The concept that it has to be black and white at the decision point is misguided, and perhaps a better approach would be probability based, with a fairly high confidence level, perhaps 95% probability of being better off subject to various assumptions.

The problem is that this calculation is impossible or inaccurate unless you know the probability that the punter will panic during the next crash and cash out. Or fire their adviser and invest in junk. Or, having initially planned to draw from the fund at a steady safe withdrawal rate, change their mind and buy a Lambo. Which you can't.

Being "better off" in the sense that the punter could draw the same inflation-linked income from the CETV without running out of money is not enough.

From a regulatory perspective it is a black and white decision, whether we want it to be or not. Either you compensate somebody who complains that they were mis-advised to transfer out of a DB scheme or you don't. Either you withdraw an IFA's licence to transfer pensions or you don't.

I agree with the general point that the headline figure is overstated. And I gave you a thanks because I like your username.

The reality is that viewing misselling as a percentage of however many were advised or however many have DB pensions is the wrong way to look at it. Virtually all misselling cases will have involved a small number of scammers who are corralling them into chicken and chips meetings and then feeding them into a sausage factory where everyone gets advised to transfer from a copy and paste template. Outside of that handful of rogue advisers, you have the majority of advisers who will be giving good advice in well over 99%+ of cases, as they have consistently shown in FCA statistics in other areas of advice.

In other words there is a cluster of advisers who are misselling in 100% of cases and the majority of advisers who are misselling in well under 1%. What the average is over both groups doesn't really matter. It's like trying to draw conclusions from the average height of a cohort of jockeys and basketball players. It's meaningless.

The FCA wants to view DB transfer misselling as a general problem that encompasses the whole adviser sector, because if that is the problem then the solution is what the FCA enjoys doing, i.e. issuing another round of guidance to everybody from the comfort of Canary Wharf. They don't want it to be a problem that involves a small number of rogues, because the solution to that kind of problem is to find out who they are and then bust down their door. That's not the FCA's comfort zone.

Given that all DB transfers over a small threshold require advice, it would have been a relatively simple task to require ceding DB schemes to obtain the suitability letter and upload it to an FCA database, with each report attached to the firm's FCA number. Any firm responsible for a large amount of DB transfers (especially in a short time period, a la British Steel) would then be subject to spot checks. Simply reading a random selection of their suitability reports would be enough to serve as an early warning system. And much cheaper than the eventual FSCS bills.

However the FCA views this kind of thing as beneath it and does not enjoy driving out to grotty offices in Wolverhampton to crack skulls. So it doesn't happen. It much prefers visiting the plush offices of SJP and Quilter, or conferences in posh hotels, and lecturing good advisers while they nod attentively.

MarkCarnage

Malthusian wrote: »

The problem is that this calculation is impossible or inaccurate unless you know the probability that the punter will panic during the next crash and cash out. Or fire their adviser and invest in junk. Or, having initially planned to draw from the fund at a steady safe withdrawal rate, change their mind and buy a Lambo. Which you can't.

Being "better off" in the sense that the punter could draw the same inflation-linked income from the CETV without running out of money is not enough.

From a regulatory perspective it is a black and white decision, whether we want it to be or not. Either you compensate somebody who complains that they were mis-advised to transfer out of a DB scheme or you don't. Either you withdraw an IFA's licence to transfer pensions or you don't.

I agree with the general point that the headline figure is overstated. And I gave you a thanks because I like your username.

The reality is that viewing misselling as a percentage of however many were advised or however many have DB pensions is the wrong way to look at it. Virtually all misselling cases will have involved a small number of scammers who are corralling them into chicken and chips meetings and then feeding them into a sausage factory where everyone gets advised to transfer from a copy and paste template. Outside of that handful of rogue advisers, you have the majority of advisers who will be giving good advice in well over 99%+ of cases, as they have consistently shown in FCA statistics in other areas of advice.

In other words there is a cluster of advisers who are misselling in 100% of cases and the majority of advisers who are misselling in well under 1%. What the average is over both groups doesn't really matter. It's like trying to draw conclusions from the average height of a cohort of jockeys and basketball players. It's meaningless.

The FCA wants to view DB transfer misselling as a general problem that encompasses the whole adviser sector, because if that is the problem then the solution is what the FCA enjoys doing, i.e. issuing another round of guidance to everybody from the comfort of Canary Wharf. They don't want it to be a problem that involves a small number of rogues, because the solution to that kind of problem is to find out who they are and then bust down their door. That's not the FCA's comfort zone.

Given that all DB transfers over a small threshold require advice, it would have been a relatively simple task to require ceding DB schemes to obtain the suitability letter and upload it to an FCA database, with each report attached to the firm's FCA number. Any firm responsible for a large amount of DB transfers (especially in a short time period, a la British Steel) would then be subject to spot checks. Simply reading a random selection of their suitability reports would be enough to serve as an early warning system. And much cheaper than the eventual FSCS bills.

However the FCA views this kind of thing as beneath it and does not enjoy driving out to grotty offices in Wolverhampton to crack skulls. So it doesn't happen. It much prefers visiting the plush offices of SJP and Quilter, or conferences in posh hotels, and lecturing good advisers while they nod attentively.

Not quite worked out how to split quotes in a reply, so replying to the whole email.
On your first point, these are all cases where the punter has clearly gone against original advice so huge moral hazard in upholding these.

Your user name is pretty good too!

I agree that the problem almost certainly lies with a very small number of rogues. Hence my comment about targeting them. I suspect that your comments about the FCA are depressingly true though. I found them high handed and initially intransigent to deal with. Took a pretty stiff legal letter to get them to change their position. I am glad that I didn't really need my own individual authorisation by that point...:D

Joey_Soap

DBdoobydoo wrote: »

Was Mrs S offered the £330K CETV since she started drawing her pension?

My situation is that I have a DB pension of £10K that is not index-linked while the widow's pension is 60%. When I started drawing it in 2012 there was no option to transfer out to a SIPP & now it's worth about 16% less in real terms. I would love to be able to transfer out what is left as even with the safest of investments I think that I can do better than a flatlined pension forever decreasing in real terms.

BTW 4% of £330K is £13.2K

To answer your questions - Mrs Soap had her transfer value offer a few months before drawing her DB pension. She drew her DB pension a year and bit before the "normal" scheme retirement date.

Indeed, 4% of GBP 330k is GBP 13.2k. But if you subtract the annual running costs of the funds and platform, then your "real" 4% income is much closer to the GBP 12k. Naturally, in contrast the DB scheme's running costs are invisible to you and in this case being from a multi billion GBP DB plan is in any case very low.

Setting aside the actual numbers, my point really is that giving up the "guarantees" that come from a good DB scheme could really be way too valuable to exchange for a superficially attractive transfer value. So in real value terms, the draw down pension, it's running costs, it's volatility shouldn't be under estimated. I really do think the default position needs to be that DB > DC transfers are not a good idea unless there's real, solid reasons to overturn that view.

shinytop

Setting aside whether transferring is a better financial option for some individuals, a large lump of cash was not what people signed up to receive, it was a guaranteed income for life via a collective investment. Why should people be entitled to change fundamentally the contract they signed up to to, for example, provide a better inheritance? Or to buy a camper van? Also, being slightly mercenary, as someone who hopes to have a long and healthy retirement, my scheme needs help from a proportion of members popping off before I do (and vice versa of course) so I'm not sure I want people with reduced life expectancy leaving (extreme cases excepted).

DBdoobydoo

Joey_Soap wrote: »

Setting aside the actual numbers, my point really is that giving up the "guarantees" that come from a good DB scheme could really be way too valuable to exchange for a superficially attractive transfer value. So in real value terms, the draw down pension, it's running costs, it's volatility shouldn't be under estimated. I really do think the default position needs to be that DB > DC transfers are not a good idea unless there's real, solid reasons to overturn that view.

A real, solid reasons to overturn that view would apply in my case where the DB pension is not index-linked but that option was not open to me when I started drawing my pension.

Malthusian

MarkCarnage wrote: »

On your first point, these are all cases where the punter has clearly gone against original advice so huge moral hazard in upholding these.

My first point involved punters who panic and cash out, and if the punter panics and cashes out then the adviser has misread or ignored their attitude to risk and capacity for loss. Ker-ching!

The second and third points involving clients who invest in junk or spunk the fund up the wall are trickier. We already know that advice along the lines of "I advise you to transfer out so you can invest in whatever you like" is a slam-dunk mis-sale, ker-ching. If the adviser can show that they advised something completely different to what the client did then it becomes woolier. The best compliance defence for an adviser is not to deal with clients who are going to ignore the adviser at all.

But I recognise that there are a lot of people who want to pay lip service to taking advice and then do their own thing (this forum has helped such people do it) and also that not every adviser can afford to turn away clients who walk in off the street.