Steve Webb explains why it’s right, more often than not, to stay in a final salary scheme.
If you start a new job today with a private sector firm, it would be very unusual to be offered membership of a salary-related pension scheme. But over five million people of working age in Britain do have salary-related pension rights from a previous job or jobs. For many people, this is exactly what they want for their retirement – an income that will last as long as they do, that doesn’t vary with the ups and down of the stock market, with annual increases to help offset inflation and providing a continuing income for a surviving widow or widower.
But over the last couple of years, roughly 200,000 people have taken advantage of the new ‘pension freedoms’ to do something different with their salary-related pension rights. They have given up those rights in exchange for a lump sum – a ‘cash equivalent transfer value’ (CETV) – and put that money either into a personal pension or into a drawdown account from which they will take an income in retirement.
Before anyone can undertake a transfer with a CETV of more than £30,000, they are required to get an expert opinion on whether this is the right thing to do in their circumstances.
Last summer the Financial Conduct Authority (FCA), the body which regulates financial advisers, published a consultation document which seemed to suggest a relaxation of the presumption that staying in your salary-related pension was the best thing to do for most people. That document specifically said the new pension freedoms mean that for some people a transfer would make more sense than before. It even suggested that advisers should start from a ‘neutral’ position when sitting in front of each individual to discuss a transfer.
However, since last summer the world of advice around pension transfers has been rocked by the case of the British Steel pension scheme. This was a scheme in which tens of thousands of workers had built up very large pension rights. The scheme was to be transferred into the lifeboat ‘pension protection fund’, but workers had the option of joining a new British Steel scheme or taking a cash transfer. Transfer values being offered routinely exceeded £250,000 and many steel workers who had lost faith in their (former) employer rushed to seek advice.
The whole British Steel episode showed both the worst and the best of the industry. Lured in by the potential of substantial income, unregulated ‘introducers’ arrived in steel towns and in many cases seem to have gone well beyond the bounds of simply offering ‘guidance’ about pensions. Some financial advice fi rms treated steel workers as if they were on a production line, instead of offering them tailored, personalised advice. In the end, the FCA had to rush down to South Wales to hold emergency meetings with advisers to remind them of the rules. In a sample survey, they found that too many workers were receiving advice that was simply not ‘suitable’ for their needs.
On the plus side, some advisers were so disgusted by the way in which the reputation of their industry was being tarnished that they set up a ‘task force’, which went to Port Talbot and other steel towns to provide pro bono help to workers who were simply confused by what was going on.
No softening on transfers
Faced with this experience, and by a Select Committee inquiry urging the FCA not to ‘go soft’ on the rules around transfers, the FCA has now published its final rules on transfer advice.
The key decision is not to soften its stance, and to retain the presumption that staying in your salary-related pension is the best thing to do. The FCA has also launched a consultation on whether so-called ‘contingent charging’ should be banned. This is a charging structure whereby you pay a higher fee to the adviser if the transfer goes ahead. The FCA is concerned that this may provide too much incentive to advisers to favour a transfer.
After all of this, a transfer will still be the right decision for some people, depending on their individual circumstances. But financial advisers will be under new pressure to make sure that they only recommend a transfer to clients when it is very clearly superior to remaining a member of the salary-related pension scheme.
Steve Webb is director of policy at Royal London.
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