Are we on the cusp of the next pension misselling scandal? I am starting to wonder if the FSA seems to think so, given its consultation on tightening up transfer values.
Its investigation into the transfer values of defined- benefit pension schemes has shown that they are simply not high enough to justify scheme members taking up the offer to move on. The regulator reports that it has seen examples of advisory firms recommending a transfer when there is “little or no justification” to do so or where the reasons given for an individual to transfer have nothing to do with their particular circumstances. This is a major concern.
More and more companies are looking to reduce their pension liabilities by offering pension scheme members a transfer out. Only last week, engineering company Cookson, announced it cut its pension scheme deficit mainly due to an enhanced transfer value exercise that had seen “a significant number of deferred members with liabilities totalling £37m” transfer out of its UK scheme.
But the FSA consultation has put these transfers in the spotlight – and it is not the first time. Last year, former head of corporate finance at Boots John Ralfe questioned a similar move by his former employer while pensions minister Steve Webb, has also voiced his concerns that members maybe losing out.
Not surprisingly, companies are quick to reject any suggestions that ETV offers they are making are anything but above board. They argue that members are given independent advice and they are simply offering them a choice rather than the mandatory offer.
That is as maybe but some experts in the pension industry question whether such advice is as sound as the companies would lead us to believe.
They argue that advisers are using out-of-date assumptions and although they may be FSA- compliant, they are still leading to far too many people giving up guaranteed and generous pension benefits.
“They are simply plugging all into a machine and if it gets the green light, they are advising to switch,” said one.
The cynics might also wonder whether some adviser firms are winning business simply because they score highly on the conversion rate. After all, it is numbers that companies want – to appease their actuaries and their shareholders.
The doubts that have been cast are backed by the FSA’s statement that its proposed changes to the way transfers are performed will prevent an undervaluation of benefits of up to £20bn – that is one mighty undervaluation.
The regulator insists that the changes mean transfer values may have to increase before an adviser recommends a transfer but it might be too late for thousands.
If you extrapolate the historical take-up rates across the half of all DB schemes believed to be considering ETVs, KPMG suggests that as many as 750,000 scheme members may transfer benefits out of DB plans in the next five to 10 years.
This could reduce total DB scheme liabilities by as much as 10 per cent or £100bn. What’s more, KPMG calculates that more than 90,000 DB scheme members have been offered ETVs to leave their schemes in past three years, with a further 70,000 expected this year.
It is estimated that one in four accept these offers, rising to one in three if there is a cash sum upfront as well.
This is a vulnerable time, given the nation’s economic plight. Pensioners are thousands of pounds a year worse off because of inflation and low interest rates and the offer of cash will be tempting for many. Last year I wrote that talk of another pension misselling scandal was premature. Now I am not so sure.
Paul Farrow is personal finance editor at The Telegraph Media Group