Defined Benefit Pension Transfer Incentives

http://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx

With many occupational defined benefit (often the 'final salary' type) pension schemes looking to close the offering of incentives to members to take their funds elsewhere seems to be growing.

I have consulted with a number of clients who have shown me their 'leaving offer' for a soon to be closed scheme alongside the new scheme details and it has been my opinion that a pension professional, let alone a layperson, is not being provided with sufficient information to make a considered comparison.

Add into the mix an 'incentive', such as a cash payment for leaving and it becomes even harder to make a decision.
The Pensions Regulator (TPR) considers there is evidence that cash incentives distort members' decision-making processes.

In a nutshell, it appears that many schemes offer a transfer value that is enhanced in some way, certainly above the current level of benefit. But once you factor in the reduction in liability in the employer balance sheet, the fact they now don't have to worry about investment performance in the future or the extending longetivity of a workforce, the deal rarely seems to favour the employee or even be fair - it often seems to favour the employer.

From the individuals' perspective, even if the details are fully disclosed, it can be hard to understand the real implications. I've seen schemes where indexation (in layperson terms, the pension goes up each year in line with the price of stuff) is being swapped out for a higher starting pension with much of the 'maths' behind this missing - so all the scheme member focuses on is the higher pension now, not the future pension that reduces in purchasing power as they get older.

Scheme trustees should be the friend of the member here. Their job is to act in the best interests of the scheme members - not help the employer save money.
Scheme trustees who are also senior in the company, or directors, should be very careful they do not face a conflict of interest.

The Pensions Regulator guidance gives 5 principles for employers to follow
- The transfer offer should be fair, clear and not misleading so members can make informed decisions
- The process should be open and transparent so everyone understands the reason for the exercise
- Conflicts of interest should be identified and eliminated or managed transparently
- Scheme Trustees to be involved from the start
- Independent Financial Advice should be available to all members and promoted

Key points (source: http://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx)
- The regulator is concerned that members of pension schemes may be disadvantaged by incentive exercises, particularly if they are not conducted in a manner that makes it most likely members will make a fully informed choice.
- Trustees should start from the presumption that such exercises and transfers are not in most members’ interests, and they should therefore approach any exercise cautiously and actively.
There will be members whose personal circumstances mean it is more likely that they would benefit from accepting such an offer. However, these cases are likely to be in a minority and, very possibly, a small minority. High quality financial advice is key to identifying those members.
- Fully independent financial advice should be made accessible to all members and promoted in the strongest possible terms. In almost all circumstances, the structure of the offer should require that members take financial advice before accepting.
- Employers should ensure that any offers made are consistent with the principles outlined in this guidance.
- Members to whom an offer is being made should be presented with the appropriate information in a way that is clear, fair and not misleading, to enable them to make a decision that is right for them.
- Trustees should engage in the offer process and apply a high level of scrutiny to all incentive exercises to ensure members’ interests are protected. Trustees should ensure that they are comfortable that the selection, remuneration and broader commercial interests of advisers are aligned with members’ interests.
- No pressure of any sort should be placed on members to make a decision to accept the offer.
- The Pensions Ombudsman can investigate complaints made by members about the administration of their pension scheme. When reviewing a complaint the Pensions Ombudsman will take this guidance, as well as other factors, into account in determining whether the employer or trustee is at fault. If the complaint is upheld, the Pensions Ombudsman can direct that compensation be made to the members. The Pensions Ombudsman’s decisions are final and binding on the parties (unless there has been successful appeal on a point of law).

So, perhaps most importantly from the above TPR Key Points:
* Members should not be pressurised into accepting transfer offers
* Members should be given sufficient time to make a decision
* Members should not be given inaccurate or incomplete information
* Members should take Independent Financial Advice

If you are offered a transfer incentive, do all you can make sure you have at least as much information as your employer and consider carefully whether an incentive is really in your best interest.

Halifax - a little extra...information please

I saw a giant poster in the window of the Halifax today, offering 2.8% on a cash ISA.

Wow, I thought, great deal.

But on closer inspection it appears (in the small print, only visible if you get right up close to the window - unlike the 2.8% - I could see that from across the street) this rate is only for 12 months - they must just have accidentally missed that off the massive writing on the advert.
Then it is just 0.5%, which is the Halifax variable rate.

Still, I thought, 2.8% for 12 months is good.

Then I noticed in the small print it said 'variable' after the 2.8%. But even in the small print I couldn't see what or how or when it varied.

So I went in and asked an employee.
As an aside, he was nowhere near as smiley as the current crop of 'employees' on the Halifax adverts but mercifully he didn't sing.

After consulting the advert, the poster and the booklet (which I had already read) he was unable to tell me how, when or why the rate might vary. "To be honest, I don't know" were his exact words.
So I told him not to worry and told him I'd call the helpline on the leaflet.

After much button pushing, selecting of options and listening to long and carefully worded warnings I spoke to someone.

When I asked them about what varied they gave the impression that if the Bank of England change base rates then the Halifax would change the 2.8% too.
So I asked why it didn't state the difference anywhere, ie if base rates go up, or down, by say 0.2% so would the savings rate.

At this point they said it wasn't anything to do with the actual base rate,it is just a rate set by them.
So I said, "right now I think I get it, when the Bank of England change base rates, you can use that opportunity to change your rate as you see fit?"
"Well", she replied, "it doesn't have to be when the Bank of England change things".

"So let me get this straight" I said. You mentioned the Bank of England changing rates, but actually the 2.8% has nothing to do with the Bank of England base rate, and Halifax can simply change the 2.8% to any other rate at any other time.
"Yes"
"So why did you mention the Bank of England base rate? That confused me, it gave me the impression the reason for changing rates was driven by the Bank of England, not the Halifax"
I continued: "So this 2.8% is really only guaranteed for today only?
You could change it at any time, to anything the Halifax want to?"

"Yes"

Hmmm - didn't say on the giant poster in the window...

The Halifax advertising tagline is 'a little extra help'
Perhaps 'a little extra information' on the adverts would be better...

Life Insurance Advert from Aviva

Regular Readers will remember my blog of 4th January regarding payment of a Life Insurance claim and one of my best friends.

I noticed on 17th january Aviva started running this advert

http://www.youtube.com/watch?v=TkyoCHCZlKw

Aviva have also announced their intention to make 2011 the year of family protection.

Mindful of my 4th January posting and the fact that I have a 10 week old baby, Life Insurance is at the forefront of my mind for two wildly differing reasons. One joyful, one tragic.

Aviva are currently offering £10,000 free insurance to any parent with a baby under 6 months old. Of course £10,000 per parent isn't enough and of course Aviva hope to sell more cover on the back of it but that's no bad thing and the 310,000 each is free. Why not check it out if you are a new parent?

Addressing Life Cover and the death of a loved one is a difficult and brave thing for Aviva to do on prime time TV and I commend them for it.
It is not often I say this about a life insurance company but "Well Done Aviva"

Banks - I told You So :-(

Banks - Treating Customers Fairly...Badly (3)

I told you so...

No one likes a smart alec and in these circumstances I don't even like to be right myself, but regular blog readers will recall my postings of November 22 and 23 last year where I lamented the generally abysmal service and bad practice of high street banks in their treatment of customers.
I explained that on numerous occasions I was spending substantial amounts of time with clients pointing out (at best) misleading info from banks and (at worst) pure mis-selling.

Sadly this has been proven in the recent case of Barclays
A fine of £7.7 million pounds and redress to customers estimated at £68 million pounds.
Good grief, what massive numbers.

If you are thinking of obtaining investment advice please seek out a qualified, fee based, independent adviser.

If this were an isolated incident I'd be less worried but I fear that before the year 2011 is out I'll be able to post a few more "I told you so" stories.
What a shame that the banking profession in the UK, once looked up to around the world, is now so tarnished...

It is worth repeating: If you are thinking of obtaining investment advice please seek out a qualified, fee based, independent adviser.


Sources:

BARCLAYS FACES BILL OF £68M FOR BAD ADVICE
Read more: http://www.express.co.uk/money/view/224001Barclays-faces-bill-of-68m-for-bad-advice#ixzz1BVuDq2z1

Barclays Fined a Record £7.7 million
http://www.freshbusinessthinking.com/news.php?CID=&NID=7134&Title=Barclays+Fined+a+Record+%A37.7+million

Barclays fined £7.7 million for Aviva fund sales failings
http://www.citywire.co.uk/wealth-manager/barclays-fined-7-7-million-for-aviva-fund-sales-failings/a463783?ref=wealth-manager-latest-news-list

Barclays fined £7.7 million for mis-selling
http://www.moneywise.co.uk/news-views/2011/01/18/barclays-fined-77-million-mis-selling

FSA fines Barclays over investment failures
http://news.yahoo.com/s/afp/20110118/wl_uk_afp/britainbankingregulatecompanybarclaysfsa


If you want to read more just google it, there are hunderds...

Blue and Green Tomorrow 2

The latest issue (no.2) of 'Blue and Green Tomorrow' magazine is out.
As a 'Green' Financial Adviser and founding supporter of the magazine (see page 24 issue 2) I am delighted with the results & response so far.

This issue has news from the World Climate Summit, details of the new Hydrogen Powered Bus running here in London, a look at electric vehicles and the subject close to my own heart, Ethical Investing.
And with less than a month to go, a few 'Green' ideas for Valentine's Day!

Next issue due out 11 Feb

4th January closed due to bereavement

Green Financial Advice is closed on the 4th January due to bereavement.

Ever since I started working in life insurance fifteen years ago and received this advice as part of my training, I have been aware that a death claim is just a telephone call away.

I have been fortunate over the last decade and a half to only have had to deal with a handful of claims.

Green Financial Advice is closed today as I am attending the funeral of a client that passed away just before Christmas.

But this isn’t just a client. And whilst any death claim is horrible and any passing is tragic, this is particularly awful as the person that passed away was one of my best friends.

I met Bill when we were in our late teens and we spent the next decade doing the things you’d expect young men to be doing!

A decade on, and he and I were best man at each other’s weddings.

Many of the happiest, funniest, most warmly recollected memories I have involve Bill.

Another decade on and tragically Bill is no longer with us. Bill was just 38, leaves a widow and two beautiful young children aged just three and seven.

It is my honour to have been asked to read at the funeral by Bill’s widow.

So even though I realise that as a life insurance salesman 'death' is always just a telephone call away and it is always painful to deal with, this claim and the events on 4th January are that much more painful.

Bill will be missed greatly by me and all who knew him.

Green Financial Advice will re-open on Wednesday 5th January.