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.
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.
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.”
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.
“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.”