This is a difficult time of year for thousands of British Steel workers.
As well as the usual seasonal pressures, through no fault of their own many of these workers have been placed in an unenviable position vis a vis their pension funds.
There has been plenty of lively – some might say acrimonious – debate around this issue in recent weeks. But with good reason, as there are very substantial sums at stake. Family futures, people’s lives, are all on the table.
Much criticism has been aimed at financial advisers. Heaven forbid we should actually be recommending that workers take up the transfer out option which is their right, in the wake of the 2015 pensions’ freedoms.
Transfer values from final salary pension schemes are at record highs, and major corporations want to encourage members to leave schemes so that they can clean up their balance sheets: but is it the right thing for the working man (or woman)?
Put yourself in the position of a 55-year-old steel worker.
The scheme is changing (and you have no influence or say in the matter) and your benefits are being reduced.
You have a guaranteed transfer value of £738,000 – not uncommon for some of these workers who have been at BS man and boy.
It is a colossal amount of money, and you can start taking the pension now. After taking the tax-free cash of £96,294, you will receive a pension before tax of £14,444 each year.
Great I hear you say, a guaranteed “gold plated” pension for the rest of your life………..but how long a life?
If we forget about inflation (I know we can’t) and investment growth (we always seem to discount this) you would need to live for a further 44 years just to break even with the transfer value.
To match the starting income and maintain the value of the capital, the investment would have to perform at a rate of 2.26% p.a. after charges. Is this reasonable?
Historic returns from the balanced managed sector indicate that it is.
The average fund has produced 5.6% each year over a period of 20 years (source FE Analytics, December 2017).
So, all things being equal, you should be able to at least maintain that income, maybe even increase it a bit, and even after fund and advice costs.
So why would you do that rather than just take the scheme pension?
Well, that worker would quite like to pass the fund on to his children when he dies, perhaps.
Equally, say the wife’s pension provision isn’t as good as his and he would like her to maintain her lifestyle if he dies before her.
And maybe he doesn’t want to take an income of £14,444 each year. He wants to take more in the early years and enjoy his retirement and reduce his income when he hits the state pension age.
All achievable – but the worker will need to leave the scheme and take on the investment risk himself. There is no going back once he has left.
That same worker will need to sit down with an appropriately qualified adviser, who, using a cash flow modelling tool has outlined many scenarios, pointing out the pitfalls and flaws in the worker’s planning, but also highlighting the fact that, given good advice and guidance, he can potentially achieve his goals.
In other words, he will understand the risks. And he will have to pay a fee for that expert advice.
It is not cheap. Because the advice is specialised, and, if he comes to The Pension Review Service, this advice profile is very much in demand for obvious reasons.
Costs are higher than (for example) a firm that doesn’t operate in this area. The advisers have more comprehensive training, and are under intense scrutiny by the regulator and the media. And the buck stops with the adviser.
Of course, it is not just this climate of intense scrutiny. Advice firms and advisers have a responsibility to guide their clients in a sensible way and justify any advice that they give (either to stay or leave).
We currently have a perfect storm, whereby the economic climate dictates that transfer values are high relative to the benefits on offer from some (but not all) schemes.
Many blue-chip companies are offering enhancements to transfer values to encourage members to leave. Members are motivated by the amounts of money involved and are taking a very practical and pragmatic approach to accessing their benefits, but there is little evidence from PRS clients of people going on massive spending sprees with their “pots”.
Members also have a responsibility to make sure they understand the process and if they do not they should not proceed.
Some firms are struggling with their advice process. They are inundated with business and finding it difficult to cope.
We have seen evidence of this as the FCA visits firms (no criticism here) and then the firm “voluntarily” gives up its permissions to transact DB transfer business.
These advice firms are not all sharks, charlatans or criminals as has been alluded to in the press and on twitter. Although I can accept that as an industry we still have a few rotten apples (which business does not?).
Most are good people trying to do the best job for their client. I honestly do not believe that taking the permissions away from some of these firms is the answer. That can lead to a poor customer outcome.
My biggest fear is that stopping regulated advice will lead to a surge in pension scams as the real criminals spot an opportunity (another advice gap).
People will become increasingly desperate to access their funds under the pension freedoms regime and there will not be enough qualified, regulated firms or individuals available to help.
And that cannot be a good thing.