Andrew Warwick-Thompson says in Port Talbot we are witnessing the detrimental impact of extending Freedom and Choice to DB schemes
Much has been written, tweeted and said about the plight of the Tata Steel workers, the role of advisers, and whether, even in the era of Freedom and Choice, transfers out of DB schemes are a good idea.
For the British Steel Pensions Scheme (BSPS) members, the key issue is how they choose to have the benefits they had accrued up to 31 March 2017 managed in the future. The trustees have offered them two choices.
Option one is to leave their pension in BSPS, which will then be transferred to the Pension Protection Fund PPF.
Option two is to switch to a new company scheme providing the same benefits as BSPS, but with lower future increases.
There is an option three, one open to members of any DB scheme, which is to take the cash equivalent transfer value (CETV) and invest it in another plan, perhaps a personal pension plan, or a SIPP, or a SSAS.
The relative merits of these options are very complicated for members to work out and quantify for themselves, and most need professional advice.
The problems in Port Talbot appear to be twofold: a shortage of suitably qualified advisers in the area; and, per the Financial Conduct Authority, a lot of the advice given to date not having been appropriate.
Freedom and Choice itself is a tangential consideration. The possibility of keeping your options open on the shape of benefits you may wish to draw - cash - drawdown - annuity - some combination of the above - may be just one factor leading members to the selection of options two or three over option one.
It is also likely that this factor has meant that more members than is appropriate have been persuaded to select option three over option two, although they are essentially the same from a ‘keeping my options open' perspective, because option three may be presented to give more ‘control' to the member.
That option may also provide more reward to the adviser - and there has been persuasive evidence from Henry Tapper to this effect in front of the Work and Pensions Committee.
My question about Freedom and Choice is what did it add to the existing, pre-April 2015 defined benefit (DB) transfer regime for people like the BSPS members?
It has been possible to transfer a CETV out of a DB scheme for many years, and to a personal pension or SIPP since 1989. There has also been longstanding transfer activity between occupational DB schemes, including those in the public sector and local government.
It was also possible to use a CETV to buy a form of annuity, or set up a drawdown product (via a SIPP or a SSAS, for example) prior to April 2015.
The only technical addition to this regime post-April 2015 is the ability to take the full DB CETV as cash (potentially subject to tax), if this is done via the intermediate step of transferring to a defined contribution plan of some sort.
There are undoubtedly some people who benefited from the pre-2015 drawdown regime, but the products were complex and expensive, and a smaller number for whom the additional post-2015 cash option may be beneficial. But this all benefits a minority of DB scheme members. Perhaps those who are in ill-health, or single, or who have other sources of income or wealth on which to rely, for example.
The political expectation that post April 2015 there would be an explosion in the number of advisers, including robo-advisers, to service demand for transfers from DB schemes like BSPS, and that the market would develop cheap, mass market products to service a majority, rather than just a minority, of consumers has not materialised.
And there is a good reason for that. For most consumers, and most BSPS members, it will probably not be the right choice.
In my opinion, the overall impact of the extension of the F&C regime to DB schemes has been detrimental.
It benefits very few more consumers than the pre-April 2015 regime and, most damagingly, it has unrealistically raised popular consumer expectation that transferring out of their DB scheme will be right for them.
That raised expectation leaves consumers exposed to the unscrupulous, incompetent and criminal, and to making a detrimental and irreversible choice more likely, which cannot be a good thing.
And we are witnessing precisely that consumer detriment unfolding in Port Talbot, right now.
Andrew Warwick-Thompson is chief executive officer of LGPS Central
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