THE QUESTION: Are cash incentives for transferring out of DB schemes right?
I believe people should be being offered enhancements to their transfer value within the pension wrapper rather than given cash outside the pension. Offering people cash lump sums brings a whole new range of behaviours into the equation. The fact you have had tax relief and deferred pay makes pensions what they are whereas giving pensions as cash appeals to people’s short term needs, but does not achieve the outcomes the pension was designed to create.
A code of practice would certainly not do any harm, as long as it specified what should be explained from the member’s point of view. If you are a member of a pension scheme and you are given a whole load of complicated numbers and projections, the chance of you understanding it all are very small. Everyone should be getting advice on how to understand what is being put in front of them, and creating a code of conduct could give guidance as to how individuals should be informed of what is on offer.
Mike Morrison, head of pensions, Axa Wealth
We understand that firms have got big DB legacies with volatile liabilities, and we have no proposal to ban incentivised transfers per se.
The issue to me is that cash is so alluring and pension rights are so obscure, I defy anyone to make a rational choice. We know that once cash is in the mix you get the insistent person, with personal, tailored financial advice, and they say stuff it, here is a wedge of cash.
Whether we can allow that to go on, they may be grown ups, but where we are asking them to make such complex decisions with such a loaded dice, is at the forefront of our concerns.
Likewise the pension increase exchanges. Of the value the punters were getting, 40 per cent was going to the firm and the employees giving up that had no clue.
I anticipate my gravestone – and on the front I want it to say damn good simplified flat-rate pension, millions auto-enrolled and reinvigorated occupational pensions. But what I dread is it will say on the back ’but thousands of people got ripped off and you should have done something’.
Steve Webb, pensions minister, Department for Work and Pensions
I have been involved in these exercises both as poacher and gamekeeper, and it does not matter how good the advice is as there are some very big numbers being offered, tens of thousands of pounds. In this climate if you are offered tens of thousands of pounds for giving up pension in the future, it is very hard to say not. So on that basis it should be banned.
Saying that, I dealt with a man last week who is being made bankrupt. He is 55 soon and by taking this offer, he can get his pension and survive. But he is an extreme example.
Not all the offers are bad. I have seen cases of critical yields of 5 per cent with cash on top, and for some of the younger members, I have said there is a reasonable chance of doing better.
Would a code of conduct improve matters? We already effectively have that – the FSA/TPR guidance is already pretty powerful, so I am not sure what a difference that would make.
I am loath to say it, because provided it is correctly advised, there is nothing wrong with it. But the last thing I want is another misselling review to deal with, so I would say ban cash incentives.
Richard Jacobs, director, Richard Jacobs Pension and Trustee Svs