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Shockwaves: BHS scandal set to fuel next wave of DB transfers

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Advisers are braced for another wave of defined benefit pension transfers as the collapse of high street retailer BHS sends shockwaves through a public worried about the frailty of the pension system.

Labour MP and chair of the Work and Pensions committee Frank Field says previous owner Sir Philip Green holds the “final responsibility for up to 11,000 job losses and a gigantic pension fund hole”.

The pension freedoms was the last big event to fuel a rise in demand for transfers from DB schemes to more flexible defined contribution products. But advisers and providers have been reluctant to deal with so-called insistent clients, leaving members frustrated.

Now MPs have hauled Green over the coals, branding his treatment of the BHS scheme and sale to twice-bankrupt Dominic Chappell the “unacceptable face of capitalism”.

Advisers fear “alarmed” DB members will try to jump ship and exit schemes only to run into the same problem as the first wave of pension freedom pensioners.

However, experts suggest changes to scheme rules as a potential way forward that would allow partial transfers, ease advisers’ concerns about leaving clients with no guaranteed income and help beleaguered funds.

Transfer catalyst 

MPs are urging Green, who bought BHS for £200m in 2000 and sold it for £1 in 2015, to fulfil his “moral duty” to BHS pensioners. A year after selling it to Chappell, the chain collapsed leaving the scheme in deficit to the tune of half a billion pounds.

Chappell is accused of “having his hands in the till” by Business, Innovation and Skills committee chair Labour MP Iain Wright and a wider investigation into the sums firms pay out in dividends compared to pension contributions is now planned.

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BHS is not alone in having a huge funding shortfall. According to DB lifeboat the Pension Protection Fund, of the 5,945 schemes in its index, 84 per cent had liabilities that outweigh assets, as at July 2016. Liabilities are measured by the cost of fully insuring benefits, which explains why deficits have rocketed (see graph) as global interest rates have tumbled.

Before she was sacked by Prime Minister Theresa May, ex-pensions minister Ros Altmann talked about changing how liabilities are calculated to better reflect schemes’ long-term nature. Advisers predict the BHS case will spark more interest in transfers.

Intelligent Pensions marketing director Andrew Pennie says: “It can be another catalyst for thinking ‘do I leave my cash there if the firm might default’ and ‘what happens if they make more changes to the DB system?’.”

Figures from adviser support firm SimplyBiz show a fifth of the estimated 3,500 enquiries it received from advisers in June were related to pension transfers.

Threesixty managing director Phil Young says: “Over the last couple of years pensions has had a high profile and that has been fairly positive. But now this will taint the view of pensions and make people suspicious.

“It gives more ammo to advisers who are making a living by flipping money out of DB schemes. At the moment it is in far too much of the financial services industry’s interest to get people out of DB schemes.”

TUC pensions officer Tim Sharp says: “Scandals like this do nothing to bolster rock-bottom public trust in pensions. But it is a stretch then to suggest that DC pensions are somehow safer than DB. Just ask any DC pension saver who has money tied up in a property unit trust that they would like to get out.”

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Partial transfers?

The Government and regulator have repeatedly said consumers should be able to transfer out of their pension even if that is against the advice of an adviser.

The FCA published guidance last year while work on redefining the base assumption that exiting a DB scheme will normally not be in the best interests of consumers is ongoing.

But Hargeaves Lansdown head of retirement policy Tom McPhail suggests partial transfers could both quell the incidents of insistent clients and help slash schemes’ liabilities.

McPhail says: “This is a question thrown into relief by the current concerns about the security of DB benefits. For a lot of retirees a mixture of certainty and flexibility is what works best. They want to be able to mix and match their savings.”

“But the majority of DB schemes at the moment offer you a binary choice, you are in or out. They don’t offer the option of transferring out some of your benefits. If you are worried about the security of the scheme or the PPF cap on benefit levels, being able to do that might have the additional appeal that it improves your overall security.

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“It’s not for most people but if you have a substantial DB benefit, being able to transfer some out might be appealing.”

Whether schemes can facilitate partial transfers depends on the fund’s specific scheme rules.

Pennie says: “This is a really positive idea and we’ve been talking about it for quite a while. We’ve had a couple of companies interested in that. It is feasible and makes a lot of sense, very few people need a level income, year in and year out.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 28th July 2016 at 9:00 am

    We’ve had it drummed into us that DB schemes are guaranteed and therefore much much better than money purchase. However, to me, ‘a bird in the hand…’ is better and hence I transferred my DB schemes as soon as I could. Sadly compliance would never allow me to offer the same service to my clients. I wonder who will be forced to pay compensation to clients who were advised not to transfer from DB because network compliance wouldn’t allow it?

    • By neither having AF3/G60 not our firm having the permissions, you cannot be blamed for what you cannot advise. I advise clients to take advice from firms with AF3 and permissions and provide them with a quote from the firms, most then balance the cost against the potential benefit and decide that the fund size is too small relative to the often significant cost of advice (to be fair to most firms with permissions they highlight what they believe should be the minimum fund value for their fee to be beneficial to the consumer) that filters out most and those few who then deem the fee appropriate compared to fund size, a good 80% remain in their DB schemes at least until just under a year to NRD.
      I personally (but I am not qualified to advise it) believe that the FCA and the FSA before it have been correct to expect those qualified to advise to approach all transfer cases as remain by default unless a clear reason for transfer can be identified and instead it may simply be more appropriate to save any additional monies in pensions in higher equity content portfolios to balance with KEEPING the DB retained benefits where they are.

  2. The whole Philip Green debacle should never have been allowed to happened.
    We were told way back after the Robert Maxwell pension scandal hit the headlines that the government had put in place pension rules where the company could not access the company pension scheme. This has obviously not worked and unscrupulous employers seem to be able to take as much from the pension funds as they want, to leave the workforce with very little or no retirement provision. Company Pensions should be ring fenced where the employer has no access to any of the funds, which would ensure the employee has at least some form of retirement security.

    • Green didn’t physically dip in to the pension, he failed to continue to fund it adequately to meet the earlier commitments made to staff, it’s not quite the same thing and is what is giving him some wriggle room at the moment to argue he did nothing illegal, which may well be the case, but it was entirely immoral for dividends to be drawn which should have been used to fund the pension commitments. One of the standing jokes about BA is that it is a pension scheme with wings! But at least they continue to try to meet that commitment!

    • Considerablyricherthanyou 28th July 2016 at 3:55 pm

      Hugh, I think you’ve misunderstood what’s happened here. Philip Green has not taken any monies out of the scheme; it’s simply that BHS has funded it insufficiently to avoid the current deficit position.

      But then if successive governments hadn’t meddled with pensions legislation so much in the past, when BHS was a thriving business, it would have been able to over-fund the scheme in years when it could have afforded to. If this had happened, the scheme wouldn’t need so much funding now.

      Or as granny would’ve termed it: put a little aside for a rainy day. That rainy day is now.

  3. With GILT rates at an all time low, transfer values for many DB schemes are at an all time high, often death benefits achieved by transfer are substantially better than staying put, especially if not married. Guaranteed benefits are not the only driver, otherwise everyone would always buy an index linked annuity with their pension fund. Flexible drawdown offers many the option to be able to vary their income as they need, with the option of buying guaranteed benefits with part of the fund to cover essentials. Every case is unique, so to accuse IFA’s of jumping on the bandwagon just to line their pockets is in most cases unjustified.

    • There will be cases where a transfer is appropriate I agree, but I think the starting point of the reverse is the right way (but I don’t have AF3 or permissions, so not my problem 🙂 )

  4. Tend to agree with you Soren

    But we live in a world where no-one is allowed to lose their money so it will be made up from a compensation scheme and levied back

    The bad walk away with their pockets full while the good have their pockets emptied !

  5. I agree with you Simon, especially when you take death benefits into account. Monies can be left for children.
    I think DB schemes need to become more up to date. Offer death benefits to children, let clients vary the lump sum/income they would like to take an so on. By doing so clients would not have the need to transfer.

  6. PensionsManager 28th July 2016 at 5:19 pm

    Green did not plunder the scheme like Maxwell. He just tried to walk away in a clumsy way. The buy-out deficit is high at most schemes since the method for valuing pensions is broken. Green is guilty of plundering BHS in terms of dividend extraction and property deals etc. Had Government not got Bank of England to buy up £350bn in Gilts and encourage ultra low interest rates then BHS might not have a huge deficit. Green sold to wrong person with no sensible plan by look of it. B&Q floated off Woolies and Comet many years ago after extracting much of the value, look what happened to them. Not disimilar, just more gradual and pre Regulator.

  7. I’m rather bemused by the institutional hypocricy surrounding Phillip Green.
    What about what the government has done to womens pensions? How is this any different in principle? Perhaps the TSC ought to give WASPI a hearing.

  8. So the employer avoids any responsibility or liability, all the risk transfers to the adviser and FOS will award compensation for business that should never have been transacted.
    It is time to stand firm and demand regulatory protection, it is the only way that we can possibly support this very dubious aspect of pension freedoms.
    I actually do take a pragmatic view of every pension transfer request, and approve many where in my judgement the client is best served to transfer. There are products out there that can replicate the guaranteed income characteristics of Defined Benefits schemes but have some flexibility, so some lateral thinking could be useful.

  9. There is now a real possibility of being sued for not approving a transfer, imagine a scenario where it would be best for the member to stay in the scheme, but he/she dies young and heirs are worse off than they would have been after transfer. Damned if you do, damned if you don’t.

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