PensionsNov 17 2017

Pension transfer 'wrong for 85% of British steelworkers'

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Pension transfer 'wrong for 85% of British steelworkers'

Advice firm Montfort International is estimating that only 15 per cent of the British Steel Pension Scheme (BSPS) members who are currently under pressure to decide what to do with their retirement nest egg should transfer out their defined benefit pension.

Around 130,000 individuals will have to choose to move their pension pots to a new plan being created, BSPS II, or stay in the current fund, which will be moved to the Pension Protection Fund (PPF).

From these, around 43,000 are deferred members, which means that transferring out their pension is also an option for them.

Transferring out is considered by the Financial Conduct Authority to be a highly risky - and irreversible - decision, as it means the pension holder giving up a lifetime's worth of guaranteed income. 

According to Eugen Neagu, head of financial planning at Montfort, there are clear reasons why a pension transfer should not be recommended for most British Steel pension scheme holders.

Mr Neagu said: “Many of the steelworkers are healthy, some of them still have many years to retire, but what happens is that the trust in the defined benefit pension scheme system has been broken due to the reduction in benefits, and it seems each and every one of them want to transfer out now.

But according to pensions expert and founder of Pension Playpen Henry Tapper, who has visited Port Talbot to speak to the British Steel pension scheme members, there is little evidence of financial advisers suggesting anything other than transfers to them.

Due to concerns about this, the Financial Conduct Authority (FCA) has an ongoing programme of "visiting advisers in the Swansea area and Port Talbot area, reminding them that there are requirements” when advising clients to transfer their pension pots.

Transferring out of a defined benefit pension into a defined contribution scheme has soared in popularity as pension holders seek to take advantage of record transfer values, as well as the option to access their whole pot in one go under pension freedoms, which aren't available with DB schemes.

Mr Neagu said: “It is not suitable for many of them to transfer out because the stock markets are fully valued, the gilts yields are low, so the expected investment return in the future will be pretty low, and it is not guaranteed.

“They will still get guaranteed pension benefits from the new BSPS, although slightly lower.”

More than 7,000 members of the scheme have requested a transfer value quotation between April and September this year, with more than 700 requests totalling more than £200m being concluded or processed during that period.

After speaking with BSPS members, Montfort is estimating that a transfer will only be recommended to 15 per cent of the members.

This is based on the assumption that “the ones who are recommended to transfer out have health issues, or are very desperate to transfer because they have immediate liabilities such as repaying a mortgage to retire and unsecure loans,” Mr Neagu argued.

He said: “In my experience [this] is usually the case for 5 or 10 per cent [of members of a pension scheme].”

Apart from these, and in the case of British Steel, “there are also members with a higher value of pre-1997 pensionable service, who are the ones that lose most as pension benefits will not increase when in payment,” Mr Neagu explained.

According to estimates, the switch from retail price index (RPI) indexation in the old BSPS to the statutory minimums offered by the new scheme could result in a 60-year-old scheme member with all their service pre-1997 losing around 40 per cent of their pension.

Mr Neagu added: “But even those, not all of them should transfer. Even though their pre-1997 excess over guaranteed minimum pension (GMP) pension will not increase in payment, the new BSPS is still a very valuable pension, and part of their pension is post-1997 which will increase with inflation.”

These members also have the GMP for being contracted out of the second state pension, which means that some of the pension payments will increase with inflation, he said.

Mr Neagu also warned that British Steel members are being approached by financial advisers on a contingency basis.

This means that there “is no fee for the pension transfer report, and [these firms are] only charging a percentage on implementation, which creates a bias,” he warned.

Mr Neagu also warned that an increase of transfer requests might not be restricted to the British Steel scheme.

He said: “Current events could easily become contagious to affect other defined benefit pension scheme with similarly weak covenants.”

Montfort will be providing advice to two scheme members living in the US, Mr Neagu said.

The firm is expecting further complexities arising in these cases due to the fact that these are emigrant members.

maria.espadinha@ft.com