Yesterday, over 200 pension-world glitterati gathered at Peterborough Showground in front of a sterling cast to debate the big issue in pensions today: DB to DC transfers. It was absolutely roasting. There was energy in the room. There were arguments. People were wearing shorts. I wished I was wearing shorts.
Before I go any further, kudos must be heaped upon Al Rush for putting together what will, I think, play a catalysing role in helping to sort out the mess we have got into. Thanks also to Royal London for the funding and Parallel Blue for the fantastic staging.
Henry Tapper (chair) set the scene pointing out that, among other things, those in the room are responsible for people’s retirement and the day may genuinely influence regulatory outcomes. Game on, then.
6 THINGS I LEARNT
1. TV VALUES PROBABLY WON’T HOLD
First up, Alan Smith covered all things to do with scheme funding and TV values. Not least an intriguing breakdown of one part of (what I can only see as) the pension scheme lottery; why similar schemes will pay such varying transfer values depending on how well they are funded. You are talking big percentages here.
Perhaps the $64,000 question of the day arose during Q&A. Q: will TV values hold? A: with the fair caveat there is no crystal ball – No. The outlook is that, due to a combination of anticipated interest rate and gilt yield rises in the next 2 -3 years, they are likely to wane.
2. THERE IS AN INHERENT BIAS TOWARDS STAYING PUT
Next up was Rory Percival, wryly explaining that the regulator couldn’t be here today. In fairness, as a policy statement on the day’s very subject is due on Wednesday, it had an excuse.
Rory said, and this observer agrees, that the regulator’s stance (in PS16 / 12) that there should always be an inherent assumption that it’s likely to be in the client’s best interests to stay is a “bit odd”. The question is whether the FCA will stick or twist here – we are all watching.
There was also a warning for advisers to be whiter than white in all DB to DC transactions and to seriously consider moving away from contingent charging – to avoid the risk of bias. I could see some squeaky bums.
3. NO MAGIC BEANS
As the temperature rose, both literally and metaphorically, John Ralfe took to the stage and delivered a clear message about the potential downsides “Nobody should think this is a clever time to cash in a pension and invest in equities”, “There is no magic equity free lunch” and “Freedom and choice is a line right out of 1984” were some of his lines. Some proper debating ensued. Voices were raised. I took my shoes off.
4. THIS IS STRESSY STUFF FOR CONSUMERS
After lunch, Greg B Davies took us through the behavioural aspects, emphasising how much this matters to ACTUAL PEOPLE. The overriding thing is that consumers get stressed when having to make a choice, and when your retirement is at stake, this is big stress and your ability to process information is impaired. The upshot is that, in many cases, people will shy away and stay with the status quo.
I was pleased to see the dreaded Italian Sports Car analogy put to bed; the reality is that spending just a little too much on a regular basis – because of having a bigger than the value of your house pot of money – can ruin things.
5. THE INDUSTRY IS MAKING IT ALL TOO DIFFICULT
Steve Webb began by setting out his stall “Pension freedoms: good” disagreeing with some previous views that a DB transfer was like winning the lottery. He argued that, with the aid of professional advice, it is a completely different thing.
The length of time it takes for CETV’s also came under fire – as it should. It’s not just the stress of deciding; doing it with a gun to your head makes matters even worse. During questions, one crafty bugger asked what percentage of pension new business going into Royal London is from DB to DC transfers; the data wasn’t available.
This begs the question as to what level of tacit approval to transfers is being given by DC providers? New Business levels are soaring, make your own mind up.
6. THE PAIN THIS CAUSES
The final speaker was Michelle Cracknell, “It’s imperative we all share experience and best practice as dealing with TVs is not getting any easier”.
Putting a real-life lens over matters, we were taken through some cases dealt with by the Pension Advisory Service – it wasn’t a pretty picture. Purchase regret by those who have transferred is not uncommon; too many people make a transfer but don’t really understand the course of action they have taken. One issue is that, unlike an ISA, people don’t tend to see pension pots as “their money”. That is, I think, until it’s too late.
My overwhelming takeaway is that we have a box of frogs on our hands. There is no real consensus across the industry, or politicians, on whether pension freedoms are good or bad. No one is arguing that DB to DC might not be the best thing on an individual basis, but the system is a joke for consumers: horribly difficult decision making, a fraught transfer system, a confused regulatory landscape, potential bias in advice, purchase regret abound and scammers hiding in your cornflakes.
There are some pension millionaires, and you might argue that this is all a rather first-world problem, but there are even more ordinary people looking to make ends meet in retirement. And all too often they are being led a merry dance. There’s now a collective responsibility to sort this, and sort it fast.