By David Brooks, Technical Director, Broadstone
With tens of thousands of members having been given the choice to either join the British Steel Pension Scheme 2 (BSPS2), the Pension Protection Fund or take their chances with a transfer value.
I am not informed enough to understand the "Time to Choose" communications to the members or the information they've had and what they've needed. However, it is clear that what has happened during the period given to members to consider their options is a deluge of requests for regulated advice and support.
Whilst much of that advice will have been appropriate, a growing minority of steelworkers may have been preyed upon by disreputable advisers. These advisers appear to be looking to take advantage of the confusion caused by complex pensions regulations and rules and also a blatant disregard to fully explain (and even understand) the risks of transferring out compared to the security of opting to join British Steel Pension Scheme 2 or move to the Pension Protection Fund.
I have to say that while the Government has a role to play, the pensions industry has been blasé in its approach to members looking to transfer out of a DB scheme. The mood has swiftly and strongly swung towards a more laissez-faire attitude to the security of DB pensions. When discussing transferring valuable DB benefits, too often the emphasis is "well, they can take advice". This is beginning to feel more and more inadequate.
Employers may see the DB transfer exodus as a good thing for liability values, and it may well be, but at what cost? The industry needs to take a more circumspect attitude. I would be the first to agree that, in certain circumstances, a transfer is the right thing. No question. However, those circumstance are fewer than we would think.
The majority of DB schemes have closed and deferred pensioners will be getting ever closer to retirement. It is clear that the proportion of their overall pensions wealth will be made of Defined Benefit provision and highly likely to be a much larger portion than they appreciate. I think the Government should encourage two things and if the Government won't, we should (as an industry) push for these reforms.
1. A review of transfer value literature so that members receive more information on the transfer value. Not the assumptions per se, but how the transfer value is calculated to explain why the number is what it is and clearly highlight that the inflation protection provided is incredibly valuable, together with a clear explanation that money may be lost on transfer.
2. More power to the trustees to refer a spurious transfer value to an approved IFA (panel appointed by Government) for a second opinion. If that second opinion is that the transfer is suspicious, then the trustees can refuse the transfer. I know many Trustees may not want to be in the position to police transfers but a triage system from administrator level up could be established.
The Advisory market
The regulated advice market remains opaque and impenetrable to the majority. Different qualifications, standards of advice, charging models etc. One area I speak to members about is how to get advice and I pity them having to go out and source a good quality adviser. The Government needs a root and branch of the standards that regulated advisers are held to so that people can understand what they're signing up to. Not a nationalisation but a review. Also clarity about the risks of using unregulated advisers. The Government’s new guidance body should make one of its first jobs a metric by which people can assess an advisers credentials.
Security of Defined Benefit Pensions
The last thing (on what's becoming a New Year’s wish list) is that I want the Government to ask the regulator to review communications to members around the security of DB pensions.
The employer covenant is crucial (and often privileged) information. However, the security of the members’ pensions relies on it, supported by the PPF. The regulator should spend some time helping people to understand this tricky balance so that the security of DB pensions can be properly understood. This should involve a revamp of the information required to be provided in a Summary Funding Statement so that it contains a more detailed description on the security underpinning the scheme.
I think the pensions industry should work towards creating an industry where members can access more meaningful information in a way that makes sense to them and at times when they need it. Much of the information is obvious to those in the know but we often take too much for granted.
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