Should You Sell Your Pension?

Via Pension Pulse.

Emma
Simon of the Telegraph asks, Should
you sell your pension?:

In an unusual move,
the Financial Services Authority and the Pensions Regulator have
issued a joint statement cautioning trustees and advisers that in
most cases such moves were unlikely to be in members' interests.

There are serious concerns that the
inducements offered – be it cash in hand or an "enhanced pension
transfer value" – are not adequate compensation for giving up
valuable guaranteed pension benefits. Such offers are being made to
employees who have previously contributed to a final salary pension
scheme. These so-called gold-plated pensions guarantee an
earnings-linked pension, rather than one that depends on the stock
market and annuity rates.

Although many companies have now
closed final salary schemes to new entrants, there are tens of
thousands of people – often known as deferred members – who have
built up rights within these schemes, even though they have later
moved jobs and may now contribute to a different pension plan.

Increased longevity and a decade of
poor investment returns mean many of the schemes are nursing large
deficits. In a bid to reduce their deficits, some pension schemes
are now offering "enhancements" to those who agree to move their
pension elsewhere.

Laith Khalaf, a pensions expert at
Hargreaves Lansdown, the advisory firm, said: "Pension savers should
think twice before accepting any such deal. They should ask
themselves why their former employer is making the offer: is it
because it is good for them or is it good for the pension scheme? In
most cases, it is going to be the latter, and people will be better
off staying put."

To make matters worse, savers often don't
have access to independent advice to help them evaluate these
complex offers. "This joint statement has made it very clear that
firms advising the pension scheme cannot also advise consumers, as
there is a clear conflict of interest, and trustees have a
responsibility to ensure their members get proper advice," Mr Khalaf
added.

But many high street financial advisers are reluctant
to advise on such issues. Param Basi of AWD Chase de Vere, another
advisory company, said: "We back the Pension Regulator's stand of
putting increased pressure on scheme trustees to ensure members'
interests are protected. There should never be a scenario where an
adviser is paid only if they recommend the member transfers away from
the pension scheme, or is paid more for recommending a transfer.
This leads to people getting the wrong advice."

He said his
company was committed to providing impartial advice to scheme
members on their options under any enhanced transfer value offer.

This is not a new problem. The Sunday Telegraph first
highlighted the issue in November 2005, when it came to light that
some companies were trying to persuade members to switch out of
pension schemes by offering upfront tax-free cash payments. At the
time consumer watchdogs complained that people were being given
payments of hundreds of pounds to sign away pension benefits
potentially worth thousands – and there were calls for the Pensions
Regulator to investigate. So why has it taken so long to issue this
guidance?

A spokesman for the
Pensions Regulator, which regulates all occupational schemes, said:
"We have had guidance on inducements since 2007." But it has now
clearly beefed up its warning, particularly its advice that trustees
should start with the presumption that enhanced transfers are
unlikely to be in the members' interest.

However, there
may be occasions when it would make sense to take up the offer, Mr
Khalaf said. With any final salary pension there is always a nominal
transfer value. This is the amount that would be needed today to buy
an income equivalent to the pension rights you have already built up.
With these offers the value is "enhanced" for those who agree to
switch elsewhere. So if, for example, your normal transfer value is
£100,000, the trustees might offer to pay £130,000 into a new
defined contribution scheme.

This
might strike many people as a good deal – but they should remember
that they will be shouldering all the subsequent risk. Investment
returns may mean that by retirement you have less than the
transferred sum. And if annuity rates continue to decline you will
need a significantly bigger pension fund to "buy" the same income in
retirement.

Mr Khalaf added: "People need to look at
the 'critical yield'." In other words, what return is needed on these
investments to get the same pension in retirement that was
guaranteed under the old scheme – remember that final salary schemes
will increase benefits in line with inflation.

"If you need
more than 6pc a year, or are only a few years from retirement, don't
even consider switching – the risks are too high," he said.

But transfer values are typically based on buying an annuity that
provides a spouse's pension. If you are single it may be worth a
switch, as you can effectively convert benefits paid to married
couples into a higher single annuity. Those with health problems
could also benefit as they should be able to buy an "impaired life"
annuity that pays a higher monthly income. As the transfer value
offered will be based on current standard annuity rates, these
people could potentially get a higher pension if they move.

Similarly, high earners worried about
the future viability of their pension fund should get advice on
switching. If a scheme's deficit caused it to go under, those on big
salaries could find themselves getting far smaller pensions that
expected, under the terms of the Pension Protection Fund (which
bails out collapsed pension schemes). The key is to get individual
advice.

Raj Mody, the chief actuary at
PricewaterhouseCoopers, the accountancy firm, said: "The use of
transfer deals is set to accelerate further. A recent PwC survey of
179 major employers showed that more than half planned to offer
enhanced transfer values to deferred members, on top of the 8pc of
respondents that already had. Likewise, a third of employers said they
intended to offer retired pensioners the opportunity to give up
future pension increases in return for a higher benefit now."

I caution pensioners and plan members to be very
careful with these "enhanced transfers". Such deals are typically conjured up
to cut costs and save the company from future pension liabilities. Of
course, if there is a high likelihood the the company will go bankrupt,
you might want to accept such a deal or risk seeing your pension
payments get slashed.

It's quite disconcerting seeing how the
pension war is being fought. Instead of bolstering pension plans to make
sure members will enjoy a worry-free retirement, companies are looking
at ways to cut costs, passing the responsibility onto individual
members. Unfortunately, this isn't in members' best interests, and the
social cost of all these cost-cutting measures will borne by taxpayers
down the road.

Comments

[i.knoknot]

i'll chime in as well

in many cases it truly may not be wise to migrate from a 'safe' (?) pension to something where you have full autonomous control..., but that is in no way a forgeone conclusion.

every opportunity to control your own destiny is always a good thing - it simply demands due-dilligence in your part to study and manage that choice.

i am always skeptical when 'they' offer you such a 'deal' to migrate. it's never because they love and care for you.

i was 'stuck' at a large college retirement fund. later, i was able to get out. that choice to migrate to a self-directed IRA was good. being captive is bad.

[VegasBob]

Looks like the Brits are learning a few tricks from JG Wentworth...

[masterinchancery]

"safe" pensions--are there such things?

[bank guy in Brussels]

Considering the fact that some of these pension plans may implode, be hyper-inflated into worthlessness, or be confiscated altogether by some future regime - there may be some logic in taking some cash now while there is some spendable cash to get ... even though it looks like a 'bad deal' on paper ...

The assumption that this whole 'pension framework' will even exist 5-10 years from now, is open to question.

[ColonelCooper]

+1. 

I thought about selling out, but was afraid I wouldn't get enough to open my Unicorn Piss bottling operation.  I decided to hold on for the "guaranteed" future payout.

That way, in addition to the Unicorn Piss, I can look into selling Elf Queef Jell-O Shots.

[TomB]

Indeed. If I had a large pension plan I'd take the loss and use the fiat to buy precious metals, agricultural land and some forest land.

[Gromit]

This looks to me like a smoke screen....under the cover of which connected insiders cash out their full actuarial value leaving an increasingly diluted remainder.

Clever of the regulators to designate them victims in advance!