Tony Byrne’s View 25 September 2017
The advent of Pension Freedoms which were introduced by George Osbourne in April 2015 ushered in an era of unprecedented benefits for people with personal pensions. These benefits are so attractive when compared to final salary pension schemes it is no surprise that many people have decided to transfer their final salary pension schemes into personal pensions. It goes without saying that final salary pension transfers are not right for everyone and that everybody should take professional advice before making an informed decision that is right for them.
So what are the advantages of personal pensions over final salary pension schemes?
- Personal pensions are free of Inheritance Tax.
- Personal pensions usually offer much higher death benefits for the surviving spouse.
- Personal pensions are inheritable not only by a spouse but by children and their descendants.
- Personal pensions when converted into Income Drawdown offer an effective 100% widow/er’s pension.
- Personal pensions give control to the individual.
In addition to this, many final salary pension schemes are currently offering unprecedented high transfer values because most of them are in deficit and these companies want to get rid of their liabilities. A deficit means that the pension scheme’s liabilities are currently higher than its assets. In other words it is technically insolvent.
The problem is that the deficits on final salary pension schemes are getting larger each year in spite of companies paying ever increasing amounts into them. This is primarily because of longevity. People are living much longer than anticipated. These schemes were not designed to pay pensions for several decades. They were designed to pay pensions for several years only!
On top of this the investment performance of most final salary pension schemes is very poor and likely to remain poor for years to come because these schemes are investing their funds in more low risk assets due to their deficits which they don’t wish to widen. The problem is that long term investment in low risk assets will inevitably produce lower returns which in turn means that the deficits will continue to widen!
What is exacerbating the problem is the FCA’s and the government’s approach which in my opinion will inevitably lead to a major financial crisis for many mostly private sector funded final salary pension schemes. Most public sector final salary pension schemes on the other hand are unfunded. Transfers of these schemes were abolished by the government a few years ago.
The regulator has persuaded many final salary pension specialist advisers to become “voluntarily suspended” which is not only jeopardising the future of these firms themselves but also the retirement aspirations of the pension scheme members too. This is because the members are effectively being thwarted by the FCA from transferring their schemes. Bearing in mind the poor solvency of many of their pension schemes and the high transfer values offered by many of them too, you cannot blame many pension scheme members from wanting to transfer.
In addition to this the Pension Protection Fund doesn’t allow transfers out. Already a third of all private sector final salary pension schemes have been “rescued” by the PPF which means that their benefits have been downgraded by 20% on average. The government is in the meantime planning to create an even larger life boat scheme than the PPF which will mean that even more members of final salary pension schemes will be denied their right to transfer their pensions away.
To cap it all the FCA is preparing to allow final salary pension schemes to give 3 years’ warning of insolvency rather than the current 12 months! This is surely a retrograde step. Individuals who are members of insolvent pension schemes deserve the right to know about the poor financial status of their schemes earlier rather than later surely so that they can then make an informed decision what to do about it!
You really couldn’t make this all up. It is clear that the FCA has an agenda against final salary pension schemes allowing transfers into personal pensions even though many, but not all, members would benefit.
The problem in my eyes is that when we get more companies with old-fashioned business models such as Woolworths, BHS, Blockbusters etc inevitably going bust with huge final salary pension scheme deficits during today’s technological revolution who will pick up the bill? The government i.e. the taxpayer, the Pension Protection Fund or its replacement lifeboat scheme or other final salary pension schemes? Or will the members themselves have to settle for much diminished pensions which to me seems the most likely outcome.
Pension freedoms means pension freedoms! The sooner the FCA allows everyone the right to transfer out of all final salary pension schemes including the PPF the better. Everybody must have the right to do what they want with their own money. Controlling people’s freedom to exercise their own judgement is a classic nanny state philosophy which has no place in the UK today. Let’s face it, does the government run the economy well? If you think not then how much faith do you have in them running an enlarged final salary pensions lifeboat scheme well?