A major misselling scandal is brewing, and for once it is financial advisers in the frame rather than the banks.
It is unlikely to reach the epic proportions of PPI claims – still pumping a quarter of a billion pounds a month into consumers’ pockets like some mini quantitative easing programme – but it will be big. Advisers should be thinking very hard about what their part in it will be.
I am talking, of course, about the growing industry of defined benefit to defined contribution transfers.
Giving up a guaranteed, index-linked income for the rest of your life and your spouse’s is a major step, and the safest advice to anyone who is considering doing so is “don’t”.
It is easy for me to say that, I am not a financial adviser. But I am sure even the most dedicated “take the money” merchants would agree that, if you were to give the same advice to everyone, it would have to be to not do it, as the vast majority clearly should not.
We are entering a dangerous phase of the growing DB transfer misselling scandal (as it will catchily be known), because the very high transfer values we now see – 30 or 40 times the annual pension – are unlikely to last.
First, the recent rise in the Bank Base Rate will make transfer values lower. Let us not overstate this. The bank rate has risen to 0.5 per cent, still the second lowest it has ever been and a fraction of its 20th century average of 5.64 per cent or even the 2.68 per cent average of this century to date (the daily average since 1694 is 4.71 per cent).
But Bank of England governor Mark Carney has hinted it may rise slowly to 1 per cent and commentators suggest it may hit twice that if the economy and consumers can cope with it. So we are heading for the foothills surrounding the eight-and-a-half-year plateau where it was 0.5 per cent or less. As interest rates rise, transfer values will inevitably fall.
Second, actuaries are also entering new territory where the steady climb in life expectancy is showing its own signs of plateauing, if not gently sloping downwards. Although the 2015 mortality figures indicated that this is happening, actuaries are slow beasts, harder to turn than a Chinese container ship.
They can still hear the past Government Actuary Chris Daykin saying in October 2005: “Previous projections have assumed that rates of mortality would gradually diminish in the long term… However… the previous long-term assumptions have been too pessimistic. The rates of improvement after 2029 are now assumed to remain constant.”
If the 2016 mortality figures also show a drift downwards, that may be the moment when actuaries cut the cash-in value of an income for what is no longer an ever longer life.
There is one certain sign of a misselling scandal: buy now while stocks last. We are entering that period with cash equivalent transfer values. Beware.
I have another major concern about the advice to transfer. Commission. Oh sorry, wash my mouth out, because since 31 December 2012 that is not allowed. I mean its evil twin contingent pricing.
Commission was banned because it created a conflict of interest between the adviser and their client. Most advisers were honest enough not be consciously swayed by the promise of rewards for high commission recommendations but it undermined trust in all. Sadly, the commission cancer has metastasised into contingent pricing.
If the adviser earns 6 per cent, even 1 per cent, of a very large amount of money if the transfer happens but nothing if it does not, where is their objectivity? Of course, no readers of Money Marketing would let so venal a consideration cloud their judgement and many rightly charge non-contingent fees not percentages. But some advisers sadly are cast in a different mould. Why the FCA has not banned contingent pricing remains one of a long list of puzzles about its behaviour.
And it is not just advisers who may encourage people out of their final salary scheme. Employers are keen to remove future liabilities as they are encouraged to believe there are large and growing DB deficits (though they too may be reduced by the prospect of future Bank Rate rises). They are offering employees not just the CETV but money on top.
Fanning those flames are two quite reasonable fears of members. First, complete and utter mistrust in the company itself and its willingness to honour its pension promises as it is sold on and loaded with debt to the profit of everyone but the workforce. And second, that ultimately the company behind the scheme will be rescued in some grubby deal to keep the widget-making profitably intact but parcel off the pension liabilities to the Pension Protection Fund. That means the pensions paid – especially for higher earners or with good index-linking – will be reduced in value.
Of course, there are cases where converting a guaranteed income for life into a Sipp or even largely taxable cash is a good idea. Where health is poor and other resources small, for example. Where it is but one of several such pensions, or where the client wants to pass the value on free of inheritance tax.
More doubtful is where it is indicated by fashionable cashflow analysis, often based on questionable beliefs about future needs and likely returns, and underpinned by increasingly discredited results from “attitude to risk” software.
If you want to be right almost all the time for almost all people “don’t do it” is the safest advice – for both advisers and their clients.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney