Commercial review tackling the pensions debarcle heraldscotland database in excel

Carillion collapsed into administration in january this year, owing financial creditors well over £1 billion, and carrying a massive £2.3 billion pensions liability, as well as owing suppliers a further £2 billion.

When tata took over british steel it also took on responsibility for the pensions of some 124,000 of the company’s pension scheme members. However, the UK operation made heavy losses and in 2017, with UK government approval, tata restructured the £14 billion fund. UK regulators accepted that tata steel UK would be pushed into insolvency if it could not step back from the scheme, which it was allowed to do in september last year.

This left scheme members with a deadline of december to decide whether to stay part of the scheme when it fell into the pension protection fund, which would deliver lower benefits than were promised originally by british steel, or to transfer to a second, tata-backed scheme called BSPS2.Defined benefit scheme


the third option was to cash up their fund and transfer out completely.

Thousands of members of the original british steel scheme opted to take the cash and transfer out. However, according to the WPC chairman, frank field, many did so in error, having been persuaded to transfer out by what field called "vulture advisers" looking to gain a percentage of the transfer fee for themselves, without regard for the wellbeing of

In its report on the british steel pensions debacle, the WPC said: "another major misselling scandal is already erupting on defined benefit pension transfers." in plain words, the report talks about members being "shamelessly bamboozled" into signing up for ongoing fees from advisors who were giving them terrible advice for putting their (the client’s) money into unsuitable funds.Defined benefit scheme

"The committee’s ongoing inquiry into pension freedom saw worrying evidence that BSPS members have, over the past year, been exploited for cynical personal gain by dubious financial advisors," it says.

While the committee is doing great work in identifying abuses, some of its utterances sound as if any transfer out of a defined benefit scheme is, by definition, bad.

In point of fact, as kirsty lister, financial planning associate at chiene & tait financial planning notes, there is no one-size-fits-all rule that works in these circumstances. There are many instances, she points out, where accepting a reasonable transfer value makes absolute sense for A, and no sense at all for B, depending on the personal circumstances of A and B.Benefit scheme

The FCA’s guidance on transfers, it should be said, is that the presumption should always be that the DB option, i.E. "No transfer", will be the better one, but the reality on the ground can disprove this from time to time, given an individual’s particular circumstances.

"If someone is absolutely risk averse, which is to say that they have no tolerance at all for risk, then the steady, guaranteed sum provided by a defined benefit scheme is the obvious route to go, and we would never try to advise such a person to do otherwise," she says.

However, for someone else, the inflexibility of the defined benefit scheme may not match up at all well to their anticipated expenditure through their early and later retirement years.Benefit scheme many people find that their heaviest years of expenditure are in the first few years and the last few years of retirement, with a reduced need for expenditure during the intervening period.

"In the first years of retirement couples often take advantage of their new leisure time to travel widely, which pushes up their expenditure. Then in the final years of life the illnesses of old age can push up medical bills. So having assets outside the constraints of a defined benefit scheme can be very valuable in helping families to match income against expenses," she notes.

There is no way that the average person is well positioned to make this kind of judgement on their own.Benefit scheme as a firm, chiene & tait financial planning present clients with a rigorous comparison of whatever transfer value is being offered, as against the value of the benefits offered by remaining in the pension scheme and would never advise a client to move where the comparison is unfavourable to a move.

However, lister points out that since the UK government introduced pensions freedom in its pensions reform, everyone in a defined benefit (DB) plan has the option of withdrawing from the scheme and moving their pension to a defined contribution (DC) scheme.

"UK government policy reforms have given pension holders a much higher degree of financial flexibility in planning for their retirement and transfer is a possibility that many find worth exploring," she says.Defined benefit scheme

One of the attractions is that a DB scheme has an inflexible retirement date at retirement age, whereas benefits in a DC scheme can now be drawn down from the age of 55.

This will not suit everyone and there is obviously a risk that the scheme could run out of money during the individual’s retirement years. But this simply speaks to the importance of proper advice.

Lister points out that the long period of low interest rates that we have experienced has boosted transfer values very significantly, often to 40 times what an individual could expect by way of post-retirement income.

This is because a low interest rate regime lowers the discount rate applied to scheme liabilities, which makes the liability figure larger. (for those troubled by arithmetic, a smaller discount rate does less damage to the scheme value, which can result in a higher transfer value for the individual.)

benefit scheme

This period of low interest rates looks as if it is coming to an end, so anyone considering transferring needs to seek advice fairly swiftly, she warns.

"At the end of 2017, inflation reached 3.1 per cent in the UK, its highest level for six years. It is now well above the bank of england’s two per cent target, which could prompt the bank to follow the US federal reserve and start to raise interest rates progressively. This in turn will adversely impact transfer values," lister warns.

Of course, markets could be thrown by some game changing event and rates could fall again, but that possibility is just part of what makes these decisions so complex.Benefit scheme

"We have advised a number of employees in key scottish sectors, including those in financial services and energy, who have benefitted from pursuing the transfer route. One individual, on a salary of £82,000 per annum was offered a cash equivalent transfer value of £1,459,000 to move their pension to a DC scheme."

"We have also seen transfer values in excess of £500,000 for people on middle income salaries," she says. Again this is just one example, and if the client was highly risk averse, the size of the transfer payment could be irrelevant and the best advice would still be not to move. 

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