Imagine if you had been the IFA who advised a deferred pensioner in the Allied Steel and Wire Pension Scheme to transfer out to a private arrangement shortly before the sponsoring employer of that scheme went into liquidation. I suspect you would be considered something of a hero by that particular customer. How many more defined-benefit schemes are going to go the way of that scheme?
Plenty more if the reports we read almost on a daily basis are anything to go by. It seems that the UK pension business is in turmoil and worst placed seems to be the once highly regarded “Rolls-Royce” of the sector, the final-salary pension scheme.
Scheme closure to new entrants is rife. Of course, this is just the start. Few schemes are going to rid themselves of the financial liabilities they have accrued simply by closing the doors to new members. For most, the final solution is to wind up the scheme. Consequently, this means that a continuing employer will be left with the task of picking up the tab of any shortfall, which is quite a difficult task at present.
Individual scheme members will choose to vote with their feet. If we can no longer safely think of the benefits emerging from a defined-benefit scheme as guaranteed, then many will prefer the personal ownership route, even if that means taking on more of the risk themselves.
Opra has proposed that schemes be allowed to downgrade the transfer value available to leavers. This has, quite correctly in my view, been likened to a market value reduction. After all, it has pretty much the same effect.
Pension schemes will have to employ whatever devices are legally available to them to stem the flow of leavers. The consequence of the change to the calculation of transfer values will be that IFAs will find it even more difficult to give advice on the subject.
A lower transfer value will mean that the alternative private arrangement will have to achieve a greater investment return to match the deferred benefits from the scheme. This will be unacceptable to all but the most adventurous investor. They may instead choose to leave their benefits behind.
Pity the IFA who suggests that such a move is safe. Pity even more the IFA who says things such as: “I do not provide advice on deferred pensions. I suggest that you leave them where they are.”
Of course, this is still advice and the IFA may well reap the complaint and pay out the compensation later.
Talking of compensation, should it not be the case that someone compensated for the so-called misselling of a pension plan should have to pay back that compensation if their previous scheme goes into wind-up with a shortfall? After all, they will have received compensation for a benefit that they actually were not going to get. I doubt very much if I will get the Government or regulator to agree with that.
How might these schemes which are currently underfunded deal with the problem? Well, the starting point should be that the employee members should be required to pay towards the cost. If they are currently paying a personal contribution of, say, 5 per cent of pay, perhaps that should be increased to 7.5 per cent or even 10 per cent of pay. That would be much more realistic.
Those employers which took advantage of contribution holidays during the bull markets might be asked to dig deeper into their pockets to help as well. Employees and employers together should bear the extra cost.
While we are at it, let us ask the Government to chip in and get rid of its stealth tax on dividend income. Of course, it won't, will it? Someone has to pay for President Blair's adventure in the Gulf. Looks like part of the bill will be at the door of future pensioners.
Nick Bamford is managing director of Informed Choice