In my last blog I recounted comments by Steve Bee regarding Final Salary Pensions. To continue his narrative, he wrote:
“Yes, employees are usually required to pay something towards the cost of such a pension but nowhere near the true cost of the benefit. For a “good” DB scheme, the total annual cost averages out at something like 23 to 25 per cent of payroll. The employer pays the lion’s share of that. And very few employees in such schemes understand or appreciate that.
“But here is the thing those people not in workplace DB schemes fail to understand: to get a “good” pension in retirement, something equivalent to the sort of pension they would get from a “good” DB scheme, they need to save something like one pound in every five earned through the whole of their working life.
“I do not know what the statistics are on that but I would hazard a guess that someone who did so from the age of 18 to 68 (a typical 21st century working life?) would be pretty unusual.
“I certainly do not think many with growing families and a mortgage, or high rental costs, and probably saddled with the task of repaying the price of their higher education, would be in a position to defer a fifth of their earnings year on year. It just does not seem possible.
“And yet we once made this “impossible” idea possible through the active engagement of employers in the provision of DB schemes. Schemes that worked real financial magic for generations of British workers. We need to discover how we might engage employers in making the pension magic work once again.”
I’m not sure if we will ever see the likes of DB Schemes again but it surely must say something to pension contributors (including Employers) that they have to think really hard about ensuring people save enough for retirement.
And maybe the Government should rethink the ridiculously low Lifetime Allowance!
A well respected name in the Financial Services Industry, Steve Bee, commented recently in “Money Marketing” about Final Salary Pension Schemes (also known as DB Schemes).
He wrote the following:
“It is not unusual for someone who has been in a defined benefit scheme for a large part of their career to have pension assets worth more than the house they are living in.
“The value of deferred pension benefits is something very few of us really understand, even those of us who work in the financial services industry.
“The fact someone’s pension could be worth more than a home they have spent their life scrimping to pay for seems too counter-intuitive for many clients to comprehend.
“How can something you get as a perk from work be worth more? It is not that painful to pay for; most people do not even notice the money going out. Surely it is just financial mumbo-jumbo to say they are worth that much? But, of course, it is not. It is just that, for many in workplace DB schemes, the value of the contribution made by their employer is grossly underrated.
“A “good” DB scheme provides a pension of a 60th of an employee’s salary at or near retirement for every year of pensionable employment completed. A 40-year career could thus provide a pension of around two thirds of the income the employee was used to receiving while at work. Such schemes are regarded as the gold standard in the world of workplace pensions.”
Savers 10 years away from retirement could lose nearly half of the value of their defined benefit pension (Final Salary) if they choose to transfer, according to new research.
The analysis from Royal London and consultancy Lane Clark & Peacock finds for those people the transfer value on offer will on average only be around 55 per cent of the “full value” of the pension given up.
It shows that for members within one year of retirement, the transfer value is, on average, 75 per cent of the “full value” of the pension given up.
Despite these statistics, the research also shows that advisers are expecting the impact of the FCA’s new rules on pension transfers to have little impact on people’s decision making.
If you are considering such a transfer, please be very wary. It may not be in your best interests.
I dont offer advice in connection with the Transfer of Final Salary Pension Schemes and havent done so for many years. Now one of the industry’s most respected firms has withdrawn from the market. O&M Pension Advice will stop offering its pension transfer advisory service from 1 July.
The firm, has now begun the process of winding down the business and has already stopped accepting new cases.
O&M will continue to produce transfer value analysis reports for advisers using its transfer bureau service, but will not be able to execute any advice.
The firm was not able to secure professional indemnity cover for its advisory services, according to director Phil Billingham, contributing to its closure.
He says: “When I took over the business in January, we had plans to become directly regulated with the FCA but unfortunately, a hardening of the professional indemnity market in the wake of the British Steel fiasco, together with unexpected difficulties with our arranged PI insurance, has forced our hand. Sourcing commercially acceptable PI cover at short notice has proved impossible.”
Former director Jason Wykes, who ran O&M until January, says: “This is a particularly galling situation, as we have never had an advice complaint since O&M Pension Advice was formed in 2014. In addition, we had a full review of our service, advice and processes by the FCA in 2017 resulting in only minor process changes.”
The move to close down the advice service mirrors Selectapension’s decision to do the same thing last year.
And why do you tell me all this, I hear you ask? Because the transfer of Final Salary Pension schemes is fraught with danger for both the client and the Adviser and is a business that is becoming less and less attractive in my opinion. (It was never very attractive to me if the truth be known). The British Steel fiasco over their Scheme has, I suppose, been the proverbial straw the broke the camel’s back.
We live in a time when the state pension age is increasing, the number of DB (Defined Benefit) Pension Schemes open to new members is decreasing, and more and more individuals will rely on DC (Defined Contribution) Pension Schemes in their retirement.
As a result of Auto Enrolment, it’s true to say the more people than ever are saving for their retirement. But the question is, will it be enough? For some, saving for retirement is at the bottom of their “to do” list. Even if it’s on their agenda, they may not be in a position to save as much as they would like.
A question I am often asked is “How much do I need to contribute?” Of course, the answer to that is another question, “What sort of life style do you want in retirement?” And the answer to that can range from “I don’t know” to “I don’t want to change my life style from what I have at present”.
Yes, we can make an educated guess, using assumed growth rates and assumed life styles. But that’s what the are – Assumed!
The best answer is generally, start early, ie in your teens or twenties and give yourself plenty of time to build up a substantial pension fund. Apologies to those of you who have just missed those age groups. But maybe you could encourage your children to start early. Trouble is when you’re a teenager, you’re never going to get old, are you?
Remember, it’s not “the timing of the market”, it’s the “time in the market”.
Firms and advisers arousing industry suspicions of wrongdoing will be placed on a semi-secret watch list to warn businesses considering working with them. The Pensions Administration Standards Association (PASA) is working on a closed list with names of pensions schemes and advisers that have been flagged up as potential scammers, to be shared among pension scheme trustees and providers.
Margaret Snowdon, chairman of the association, said the goal of the list isn’t to stop any pension transfers, but to raise awareness among trustees and providers when a name in the list pops up, so they can increase their due diligence. She said: “Some providers and trustees have their own watch list. What we are looking for is to create a closed network where they can share this information.” Ms Snowdon is currently in talks with the National Fraud Intelligence Bureau, the Financial Conduct Authority, The Pensions Regulator, HM Revenue & Customs and the Pensions Ombudsman to involve them in the creation of the list, which she expects to be launched by the end of the year.
However, details such as how the information will be shared, who will be in charge of the list or how potential legal implications will be avoided are still being discussed, she added. We understand that the FCA is aware of the creation of this list but it’s not involved in these discussions at this time.
Several industry experts, however, have raised concerns about the efficiency of such watch list. Steve Webb, director of policy at Royal London and former pensions minister, said: “As a provider, and particularly as a member-owned business, we are very keen to explore ways in which we can better protect our members’ money at the point of transfer. The idea of a list of receiving schemes where concerns have been raised is an interesting one which should be explored, but it would be likely to raise considerable practical and legal difficulties”.
Yes, we agree, but it is vitally important to protect the public from unscrupulous, individuals who give those of us who give good, solid advice a bad name.