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Nic Cicutti: Has FCA glossed over the facts on defined benefit transfer issue?

The regulator has released incomplete statistics to prove its point, which leaves more questions than answers

Is it possible to feel entirely contradictory emotions about individuals or organisations in terms of what they are and the underlying point they are making? I found myself facing that dilemma twice last week, courtesy of a set of tweets from Financial Times pensions correspondent Josephine Cumbo. I hasten to add that the tweets themselves were not the issue.

The first tweet related to an article in the Daily Telegraph written by Boris Johnson almost five years ago.

As we know, Johnson is standing for election to become leader of the Conservatives. In my biased opinion he is a buffoon and unfit to be the UK’s next prime minister. Yet Cumbo’s tweet contained a link to said column, in which Johnson called for the UK’s public-sector pension schemes to be pooled into one gigantic fund, with the money used to pay for roads and housebuilding.

Johnson reckoned a merger of the 39,000-odd public-sector funds in existence in the UK could yield savings of up to £5bn a year in fund management and advisory fees. Cumbo quoted Johnson as saying, in his inimitable style: “Think of all those advisers and investment managers taking their fees – their little jaws wrapped blissfully around the giant polymammous udder of the state. Think of the duplication.”

Now, before someone writes in to tell me that the UK’s public-sector pension ecosystem is infinitely more complicated than Johnson lets on, yes, that is true.
And I am not sure either that millions of existing and past public-sector workers’ retirement pots should be used to subsidise infrastructure projects where the money can’t be found by more conventional means, such as taxation.

But, at the same time, there is massive resource duplication in the public-sector pensions system and rationalisation is well overdue, as well as bringing in some proper oversight of how scheme members’ money is invested.

Or, at least, that’s one interpretation of the haphazard way many local authority pension funds, including Derbyshire, West Yorkshire and Dyfed in Wales, sank tens of millions of pounds of their members’ hard-earned cash into Neil Woodford’s Patient Capital Trust Fund. A bit more scrutiny of what Woodford was up to in terms of his many illiquid investments probably wouldn’t have hurt.So here we have it: a complete nincompoop says something that vaguely makes sense.

I felt similarly conflicted by another tweet from Cumbo a few days earlier, related to an article she co-wrote about the FCA’s survey of defined benefit pension transfers between April 2015 and September 2018. The regulator surveyed 3,000 firms, of which 1,450 advised 70 per cent or more of their clients to transfer their funds out of DB schemes to defined contribution schemes.

The FCA has long argued that the majority of DB pension scheme members were better off staying put. Their pensions pay out secure, index-linked retirement income for life, as well as other benefits to spouses and other beneficiaries. Yet the regulator’s survey found that, during the period in question, of the 234,000 scheme members who received transfer advice, 162,000 went on to switch their pensions to DC arrangements. The total value of DB pensions where transfer advice was provided was around £83bn.

Cumbo’s article quoted FCA executive director of supervision, wholesale and specialists Megan Butler as saying: “It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.”
She was right, of course. Except that what wasn’t reported quite as widely by my colleagues in the UK media was the accompanying information in the FCA press release to the effect that half the number of firms in the survey kept records of triaged transfer requests.

As a result of initial triaging, almost 60,000 clients did not get as far as proceeding to advice. When these triaged clients are included, the proportion of clients who were recommended to transfer falls from a widely reported 70 per cent to 55 per cent. That’s still an incredibly high number. But the chances are also high that many more prospective clients were triaged out of the DB transfer pathway without records being kept of the process.

I’m uncomfortable with this lack of recording as it is likely many clients will have bounced around the advice market like pinballs until they found someone willing to indulge their request for a transfer. But I’m also uncomfortable with the way the FCA has released incomplete statistics to prove its point. Ideally, I’d have liked to see a quarterly breakdown of the DB transfer figures, to assess whether they showed an improvement in the quality of the advice given over time.

I would have liked figures showing the extent to which some firms were more or less exposed to transfer business. That would have given us an indication of the extent to which this issue applied across the advice industry. As it is, we are left with statistics that beg as many questions as they answer; where easy headlines are seen as a substitute for concerted action to stop the DB pension transfer scandal. Or is the FCA closing the stable door after the horse has bolted?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Nic. You’re slightly out of step with FCA; I attended the Patient Capital conference with FCA earlier this year where the theme was how to enage more with retail investors and get them to invest their pensions in patient capital – not necessarily Neil Woodford’s fund but British Capital Trust (https://www.britishpatientcapital.co.uk/). I for one raised my concerns at this event especially over liquidity issues. Others there too from the advice sector recognised these but the presenters from the Treasury, the IA and FCA were keen to identify how to engage retail investors.

  2. Interesting article – Triage is common and I’d also add the fact that enquiries will be (to a large extent) self selecting.

    I.e. only those who feel they may want to transfer out of the scheme (and have reasons to do so) are likely to seek advice. Whilst this, in itself, shouldn’t sway the adviser it will certainly skew the statistics and therefore needs to be factored in.

    With regard to broader media coverage, what concerns me (and this isn’t aimed directly at Nic nor Josephine) is that many stories not only report the details but also overlay a perception of the views of the journalist – and therefore in turn are likely to encourage the reader to reach a view point based on the journalists own views (?agenda).

    Bearing in mind the starting point of the article (i.e. statistics don’t always portray the full story), we therefore need to be wary of of 2 + 2 becoming a gazillion.

  3. Julian Stevens 5th July 2019 at 2:23 pm

    I still don’t understand why the FCA is so against triage. Giving the client a considered opinion (no more) that the not inconsiderable cost of a full analysis and report is unlikely to be money well spent achieves two things which, so it would have us believe, the FCA wants to see (though we never know if they really mean anything).

    1. It saves the client a lot of money (isn’t that what the FAMR hopes to achieve?) and

    2. It suggests (without the provision and costs of full and binding advice) that s/he’ll be better staying put (FCA default position).

    So just what is the problem? And what, BTW, is the FCA’s position on Contingent Charging? It seems to be too constipated to commit itself one way or the other.

    • I thought the FCA were in favour of triage. The problem, as Rory likes to point out, is that it’s very nuanced and there’s a good chance it could be construed as advice. On that basis I suspect the FCA/FOS/FSCS like it even more… later issues can be covered as advice.

  4. Mr Boleyn PFS 5th July 2019 at 2:41 pm

    I transferred my own DB scheme 3 years ago. I did so because I preferred the ability to control the amount I withdraw from the plan based on my own personal situation, to avoid the need to pay for whole of life insurance by creating a pot for my wife if I predecease her and because I don’t need the guaranteed income provided by the DB scheme. I am aware that the critical yield was 4.2per cent to buy at age 65 the same pension and death benefits I gave up and 5.2 per cent at age 75. But actually I have no further interest in comparing the amount I would have got from the DB scheme now that I have transferred out. I know that in certain market conditions and with a very long life expectancy I may have been better off with an increasing guaranteed scheme pension but I don’t find that comparison relevant. I also consider that because I am unlikely to need the transferred pot during my life time I find it helpful to leave the unused pot to my adult children who are too old to benefit from a dependants pension in the DB scheme. So in other words it’s got sod all to do with the plain comparison of critical yield. Lots of people with more income than they need transfer for reasons unrelated to the simple comparison of dB and new scheme income

  5. “Cumbo’s article quoted FCA executive director of supervision, wholesale and specialists Megan Butler as saying: “It is deeply concerning and disappointing to see that transfers are still being recommended at the levels we have seen.””

    This is all part of the ongoing narrative that the FCA can point to later down the line. We told them. We told them several times but they didn’t listen.

    The real question is, if the FCA are so concerned, apart from issuing fuzzy guidance and making pointed comments, exactly what concrete actions are they taking to prevent harm to the public that are being badly advised right now?

    Actions speak louder than word, right?

  6. Well I think the DB market is dead now. The FCA and the PI insurers have seen to that. In my network a £20k liability per case for life?? You couldn’t charge enough to cover that liability.

    • Julian Stevens 8th July 2019 at 8:56 am

      Presumably you mean a £20K excess on any PII pay out? I’ve read of some insurers imposing much higher excesses than that, which means that your situation, though unenviable, isn’t as bad as for some.

      And what about run-off cover? I imagine that’ll be hugely expensive, if you can get it at all. If the FCA is in any way serious about the FAMR achieving its objectives, a good place to start would be restoration of the long stop though of that I think the chances are remote.

      And I bet the FCA has no PII in respect of its own endless catalogue of failings. Even if it were to try to obtain cover, prospective insurers would take one look at its track record and swiftly determine that it poses such a dreadful risk that the premiums offered would be so large as to necessitate a sizeable hike to its levies which, in turn, would deal the objectives of the FAMR another body blow.

      If ever there was an exercise in futility, the FAMR must surely be as prime an example as it’s possible to imagine. A complete waste of time and, as usual, other people’s money.

  7. I wonder what the statistics would be if records existed for all the advisers who ran a triage and then only outsourced the possible transfers to a specialist firm. From my own figures a high majority were advised not to transfer and only a small percentage were referred on of which all but one did transfer.

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