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Carl Lamb: Will mistrust start a new DB transfer wave?

So, British Steel has been placed in compulsory liquidation, following the breakdown of talks between its owner and the government. It only seems a short while ago we were dealing with the last crisis for the company’s beleaguered pension scheme members. Back in 2017, they were given inadequate help as they tackled the decision about whether to move their savings to the new British Steel Pension Fund, take benefits via the Pension Protection Fund or transfer to a defined contribution scheme. As we know, this was a complete disaster that resulted in many wrong decisions occurring.

Workers who did transfer to the new scheme will now be asking themselves if they made the right choice, which will inevitably lead to a further rush to look at getting out before the pot is compromised again.

The big questions this time around are whether or not British Steel’s workers will have access to sound financial advice before acting, and if the regulator can accept mistrust as a factor in a decision to transfer.

Many firms are reluctant these days to take on large numbers of defined benefit transfer cases, so choice is limited for anyone wanting advice.

The Personal Finance Society has tried to make it easier for people to get reliable advice with the introduction of the new Pension Transfer Gold Standard. Its principles are all about making sure the scheme member understands the advice process, and setting out guidelines for best practice. The challenge, however, will be to communicate the message to those who need DB transfer advice and to ensure they go to firms holding the new standard. Education will be key.

But there is another big drawback for those who might want to consider a DB transfer now: the sky-high transfer rates of a couple of years ago have long gone. The dilemma will be whether to stay where the benefits are potentially higher but might be at risk if the company collapses, or to move benefits into a DC scheme and compromise their value.

British Steel is not the only large business in the UK that is struggling in the current financial environment.

We may yet see more DB scheme sponsors finding it difficult to continue trading and more groups of workers with their pension entitlements at risk.

If the current economic climate continues, we might see a new wave of DB scheme members wanting to explore the possibility of transferring.

Mistrust of the safety of their entitlements may be the driver, and this puts them in a position that is inevitably vulnerable.

As advisers, we are stuck between a rock and a hard place again, where we’re damned if we do and damned if we don’t provide DB transfer advice.

Yes, we’ll be able to charge fees on all those new potential cases, but the risks of that advice coming back to bite us in the future remains very real.

How can we allow for the potential risk of the collapse of a scheme sponsor in our advice processes? How do we measure mistrust?

Should we be comparing benefits between those available from the PPF if the scheme is inadequately funded and those from a DC scheme, rather than the actual scheme benefits?

I don’t have an answer to this latest dilemma, but I do think that as a profession, we need to talk about it.

Carl Lamb is managing director of Almary Green

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Carl – you hit upon a very important point that is often overlooked, which is the ability of a scheme to meet its obligations both now and in the future. I will give odds of a pound to a penny that we will see, in the not too distant future, lawsuits against advisers who adopted the FCA presumption against transfer only to find the scheme defaults later. As with all financial offers, consideration needs to be given to not only what is offered, but also the ability of the party offering it to deliver what they are promising.

    • @Alan Blythe. Absolutely there will be lawsuits. Lawsuits on the basis you cite, as well as anything else the CMCs can think of. What a tricky place an adviser is in when looking at a potential DB transfer. Imagine: Phil Green still owns BHS, but you think it’s looking dicey: trading losses and a big pension fund deficit. The new arrangement looks worse than the BHS benefits, but marginally better than the PPF benefits. Looks like a prime case for a transfer. But you are a brave person to call that, only to find BHS being snapped up by Wal-Mart (say). Damned either way.
      Let’s not beat about the bush, there are some shocking transfer recommendations. Probably more often that a bit of rounding up driving a marginal decision one way or another, the really bad stuff is in the subsequent investment choice, but where it has been done properly, the FCA are going to have to be moderately lenient in their interpretation of poor advice because, despite their appearance otherwise, the FCA do not have any better a crystal ball than any of us. By applying a tourniquet of new rules, they may well be implicitly second guessing what markets, and corporate and political Britain might look like in the near to long term future; and then expecting advisers to pick up the tab when they are (inevitably) wrong some of the time. That should drive all DB transfer advisers away from this market, which is not in the public interest or, worse, it will leave only the “make hay and then get the hell out” brigade which is the worst outcome of all.

  2. The PPF benefits should be looked at as the worst case scenario if the decision is to remain in the scheme, if those numbers meet the member’s retirement needs then the advice to remain would be justified, whether or not the employer goes into liquidation at a later date.

    For many members the scheme benefits plus State Pension entitlement will never be enough, so the promise of potentially greater riches will influence their decision, certainly if advisers sow the seeds of doubt regarding the viability of the scheme and the potential loss of more than 10% of the benefits, rather than looking at the security of the PPF underpin.

    • @geoffsharpe I agree however as the PPF is part funded by levy on remaining DB schemes I suggest it might face issues in funding itself in the years to come if the number of open schemes diminishes further. There is currently £30bn in the coffers with 230,000 “members” to be paid out so the viability of the scheme might yet be tested as that is £130k per member (if my maths is correct).

  3. All forms of mistrust are generating excess interest. Indeed I have advocated before on these blogs that a critical yield model in isolation is unfit for purpose and should include some allowance for credit worthiness. The problem is that introducing credit ratings of the sponsoring employer, level of funding of the scheme into the analysis model as one should, leaves you wondering how can you determine that credit rating for a company that hitherto has not needed to get one? Moreover, how do you make one in a febrile “ban it and regulate it” government environment, when one day you are a successful injection moulding business and the next, bankrupt because of a hyperbolic outbreak of anti-plastic mass hysteria? By the time your alanysis has passed the company as being sound, it is possibly out of business.

    The regular threat to the tax advantaged status of the PCLS, particularly with the possibility of a Jeremy Corbyn government in the near to middle future will be another driver. Although the arithmetic may still show that loss of the tax advantage on the 25% may still make a DB transfer a poor economic choice, you cannot really argue against a punter wanting to take the “bird in the hand” approach to life. In extremis, the government may well nick the lot. A World Bank tribunal can award ConocoPhillips $8bn compensation for having its oil production assets confiscated in 2007, but it doesn’t stop it happening. And it takes forever to get the inevitable nothing back. So are we surprised at the mistrust?

    As Honda and Ford have both said, the UK government is becoming (or at least sounding like it may become) an unreliable partner, and the FCA will need to take this into account when they (inevitably) crack down on DB transfers. You cannot price fear into your economic model but it should be recognised as a valid decision driver especially when left wing think tanks are burping out great swathes of brutal taxation proposals on a near daily basis.

  4. Excellent article and comments.

    How do you place a value on a clients mistrust in the scheme/employer? Even if you can, if your advice is challenged by an Ombudsman, would this factor be ignored anyway?

    Crystal balls are required. The pitfalls for advisers active in this advice area are many and varied, and the tail risks for advisers last years. The only certainty is where the blame will be laid when things go wrong; advisers.

    Is the lure of advice fees leading to masochism?

    It seems clear to me that the advice community is just viewed as a utility. Government and the FCA have mandated advice, but ultimately, do they REALLY have skin in the game if it all goes wrong? We all know the routine. Treasury Select Committee puts pressure on the FCA. FCA puts pressure on advisers. FCA tells TSC that it’s all the fault of us pesky advisers. Advisers cough up.

    Which all begs the question, why bother? The only point at which the powers that be will start caring, is when there are no advisers left who are willing to give advice in this area.

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