It is not often I get the chance to begin a column on pensions by referencing a film about a hyper-intelligent, man-eating shark. However, while watching Jaws 2 over the festive period, my mind (rather depressingly) wandered to the issue of defined benefit transfers.
The iconic tagline for the film, “Just when you thought it was safe to go back in the water…”, has been recycled countless times and neatly encapsulates the unexpected return of an apparently vanquished source of terror.
In a (sort of) similar way, prior to April 2015 it appeared the debate on pensions provision had moved away from DB – which has withered on the vine as company after company has backed away from providing guaranteed pensions for staff – and indelibly towards defined contribution.
With automatic enrolment nudging millions of people towards taking responsibility for their own retirement future, it seemed that making this market work would be the primary focus for Government, the regulators and the industry.
However, the introduction of the retirement freedoms, creating a more flexible and attractive environment for DC savers, coupled with the financial difficultly facing some DB schemes has thrust the issue of pension transfer advice firmly into the spotlight.
In particular, the behaviour of some individuals who have engaged with members of the British Steel Pension Scheme has caught the attention of both the FCA and the influential Work and Pensions Committee.
To re-cap, 125,000 British Steel Pension Scheme members had to make a decision after the sponsor decided to shutter it to future accruals from March 2017.
Members were given three choices:
- Stay in the current scheme, which will start moving into the Pension Protection Fund from 29 March 2018
- Transfer to a new British Steel scheme, which provides similar benefits to the existing scheme but with lower future increases
- Transfer out to a DC scheme.
The FCA kicked into action towards the end of 2017 to remind advisers based in and around the Port Talbot steelworks of their regulatory responsibilities in relation to pension transfers.
However, media reports suggest some members may have already been coerced into quitting their DB scheme without really understanding the consequences of their decision or where their money would be invested.
As one senior executive at a major advice firm put it to me recently: “The sums involved for a lot of these people feel like a lottery win, and the risk of members being preyed upon is enormous.”
As we move through 2018 the issues of DB transfers, advice and the protections offered to savers will likely remain front and centre for both the regulator and the wider industry.
Striking a balance
The FCA had, of course, already taken an active interest in DB transfers prior to the British Steel controversy erupting in the press.
In October last year, it revealed the outcome of a suitability testing exercise on 88 positive DB transfer recommendations. It found almost half (44 per cent) were suitable and around a fifth (18 per cent) unsuitable. For the remaining 36 per cent of cases, the regulator said “it was unclear if the recommendation was suitable”.
While not exactly a smoking gun, there is absolutely no chance the FCA will let this issue rest. What is less clear is what interventions, if any, it will pursue as it attempts to protect savers.
DB transfers tend to polarise views among advisers and industry commentators, and the two ends of the spectrum were perfectly summarised in a Tisa seminar I attended towards the back end of last year.
The first speaker (who I cannot name due to reporting restrictions on the event) argued that, counter to conventional wisdom and the FCA’s historic stance on pension transfers, saving in DC could be the right route for most people.
He suggested the flat income (usually adjusted upwards by inflation) provided by DB is too rigid and many retirees would benefit from being able to flex their payments to meet their needs and lifestyle choices.
The second speaker argued passionately in the opposite direction, pointing to the fact many DB members – and in particular those in the British Steel scheme – were being left exposed to fraudsters and dodgy individuals who do not have their best interests at heart.
Both arguments have merit and deserve serious consideration. And while headlines will likely continue to surface focused on pockets of poor practice – and comparing the current situation to pensions misselling scandals of the past – it is worth remembering the environment advisers operate in today has been reformed beyond recognition in the intervening decades.
The media and others are, of course, right to expose and report potentially dodgy behaviour. But equally it is vital any policy interventions are informed by facts rather than rhetoric.
Tom Selby is senior analyst at AJ Bell