Pensions – a windfall for the wealthy?


I’ve talked in recent articles about the impact of higher transfer values on people living in Port Talbot and Redcar, and in the British Steel Pension Scheme. Around March last year, those transfer values in some cases doubled. Why?

There were two reasons.

  1. The scheme moved to a single discount rate for all members
  2. The scheme started de-risking – moving from a growth based strategy to a “lower-risk”, bond based investment approach.

What this did was to lower the discount rate applied to transfers , increasing transfer values, especially for the younger members (who had previously seen transfer values depressed by higher discount rates).

Apart from the small kicker to transfer values brought about by a cash injection into the scheme in the summer (bringing the reduction from the insufficiency report from 7% to 5%), these two reasons were perhaps the biggest contributors to the run on the scheme that happened in the autumn.

The perverse impact of de-risking

What a sudden shift from growth to defensive investment strategy creates is a big hike in the transfer values for the benefits of deferred members. This is – as far as I can see, ignored in the Pensions Regulator’s guidance on funding but shouldn’t be.

Of course, the richest members can pay the “exit penalty” which is what transfer advice is currently seen as

As CETVs are only available to a proportion of DB scheme members, the uplift in transfer values is a perk just to those who are not drawing their pension. It’s paid for primarily by the employer (through the special contributions needed when growth is taken out of the actuarial assumptions – the scheme discount rate).

This creates all kinds of conflicts within the scheme, especially where those driving the shift to bonds stand to benefit by high transfer values. It is one of the few areas of remuneration not covered by modern governance, but Directors of large companies with DB schemes, can profit from de-risking with no declaration that they have been both author of and beneficiary of, the improvements in transfer values. They can do so – simply by taking their transfer value.

It also creates a feeding frenzy for advisers and the long-tail of lead generators on one hand and fund management flunkies on the other – all of whom share in the financial orgies  we have seen in Port Talbot, Dagenham (Ford) and the Leeds conurbation (HBOS) – to give but three examples.

These conflicts – between the interests of members (in terms of more secure funding) and the interests of members (in terms of higher transfer values) have not been properly thought through by policy makers.

The perverse impact of de-risking a scheme’s investment strategy, is that it rewards deferred members at the expense of pensioners and it requires trustees to pay out their hard-fought prudence to people who have no interest in being ongoing beneficiaries of the scheme.

The absurdity of regarding these transfers as “de-risking”.

I have heard it argued, in learned actuarial circles, that because CETVs are calculated on “best estimate” terms and the scheme’s accounting position calculated on a formula closer to “buy-out”, that every transfer paid – is a step closer to scheme solvency.

This is nuts, it is a step closer to “buy-out” with an insurance company, but it is step further from doing what the scheme set out to do – pay a wage to life for its members.

It is only in the febrile world of “de-risking” , that an understanding of the wood could be so lost by the view of individual trees.

The best DB scheme is a scheme that stays open. Encouraging the taking of transfer values by enhancing or even promoting transfer values risks giving away the prudence in the scheme’s investment profile to those few members with the transfer opportunity.

Democratising the opportunity to transfer is not the answer

The current madness is about making it easy for all deferred members to share in the spoils of DB schemes. This is the argument being used for maintaining contingent charging. It argues that members without the financial capacity to pay for the advice on whether to transfer, should be able to do (in a tax-advantaged way) after the transfer has been paid. There is no logic in this argument – if you consider that most people shouldn’t transfer.

Of course, the richest members can pay the “exit penalty” which is what transfer advice is currently seen as. If a member can see they are benefiting from the overdose of prudence – (a simple calculation dividing the pension forsaken into the CETV), then the advice simply becomes a compliance ritual on the way to the payment of the transfer.

A friend last week asked me what his wife should do. She has just discovered her CETV is worth more than £2m. I was forced to explain to him her options. He was both appalled and delighted; appalled that she could be given such a grant without any public financial declarations and delighted that it allowed them both  – a windfall payment that could fund their future business.

He understood the conflicts, but legally neither he nor she has to declare them. Why should they. The CETV will remain their guilty secret. So it goes for tens of thousands of our new pension millionaires.

And yet…

With equity markets at all-time highs, with a world economy looking in fine shape and a UK economy seemingly impervious to BREXIT, what could possibly go wrong with managing your own pot?

UK Defined Benefit Schemes, with the benefit of crippling special contributions, have finally worked their way into the black.

But they have done this while giving away much of the family silver (£34.25bn in 2017 alone). Rather than paying out that amount as pensions – as originally intended by HMRC and those who set up these schemes, trustees have paid this amount out – mainly to the richer deferred members, to fund wealth management programs.

Each of these programs is now taking on the burden of funding individual retirements (though we have seen in recent blogs that some are simply being used for IHT mitigation).

The perverse windfall to the rich

I am not a conspiracy theorist. I don’t think that CETVs is a plot hatched by advisers and trustees for the benefit of cronies with large deferred pensions. I am not saying that the Pensions Regulator was complicit.

I am saying that this is the perverse consequence of the drive to de-risking, the mania for self-sufficiency, the blue funk that is called the “glide – path to buy-out”.

It is only one of the consequences, but it is a major issue for schemes big and small. Small schemes can see huge slices of their assets and liabilities walk out of the door in one transfer. Big schemes can see multiple transfers which add up to the same thing (Barclays lost over 15% of its scheme in one year to CETVs).

Nothing much will be said about this, unless I say it, because nobody who understands it, doesn’t have some skin in the game. Even the Pensions Regulator – is to a degree – compromised by insisting on “prudent” investment programs.

It’s time we came clean on this issue and recognised that one of the reasons for the glut of transfers – is because of the value of transfers. Transfer values are so high, because schemes are de-risking, schemes are de-risking because advisers and Regulators tell them to de-risk.

What does not seem right, is the ease with which the prudence earned by schemes through special contributions from employers can be dispersed to the senior employers of the companies sponsoring the schemes.

What does not seem right is that many members in these schemes (or all financial make-ups) are taking CETVs with little understanding of where the money is going and what the cash-flow consequences for them or their families might be.

These seem very real problems for the Pensions Regulator today and tomorrow.


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11 years providing financial advice to individuals directly and through employers. 14 years within insurers working with advisers to provide better DC and DB outcomes. 25 years left to make a difference!

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