PensionsDec 21 2017

What choices do BSPS members have?

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What choices do BSPS members have?

Tata Steel UK is the sponsor of BSPS and was in danger of becoming insolvent if it continued to support the pension scheme. In most cases where a pension scheme’s sponsor has become insolvent, or is likely to, the pension scheme assets and liabilities roll into the Pension Protection Fund (PPF). If this happens, pension scheme members do not have to make any decisions about what to do with their money as there are no options. However, in the case of BSPS, the trustees thought that the scheme was large enough (at £15bn), and robust enough, to separate from Tata Steel UK and to continue as BSPS II.

The trustees persuaded the regulators of this course with the support of three fundamental agreements with Tata Steel UK: that they would continue as the legal sponsor of the new scheme (BSPS II), that they agreed to pay £550m to BSPS II, and that they gave BSPS II a 33 per cent stake of their own business.

As a result, scheme members have a choice about what to do with their money: stay with the original scheme (BSPS) and, by default, roll into the PPF, move to the new pensions scheme (BSPS II), or— for those who are younger than 64 and have not started taking their pension — to transfer out to a different pension arrangement. Of the 130,000 members of the scheme, 88,000 are already taking their pension and 43,000 are deferred members.

According to the trustees, BSPS II is better value than the PPF for the majority of scheme members who are already taking a pension, including those on a spouse’s pension or on an incapacity pension. The table in Figure 1 compares the PPF and BSPS II to the current scheme (BSPS). There are a few areas where the PPF option is financially better for an individual who has not yet retired.

PPF

BSPS II

Benefits lower for some members

Benefits the same

Annual increases lower

Annual increases lower but will be the same as or higher than in PPF

Spouse's pension is 50% and is calculated after tax-free cash taken

Spouse's pension is 50% and is calculated before tax-free cash taken (more generous than PPF)

Can be more generous with tax-free cash

 

Can be more generous if retire early

 

Transferring out is an option open to some scheme members and is more complex. It involves members taking additional risk in exchange for potentially greater rewards and/or greater flexibility. The additional risks are around: future investment returns, life expectancy, inflation and dependants’ benefits.

The trustees have published the cash-equivalent transfer value (CETV) assumptions as a technical note on their website. Like-for-like, for members to obtain superior investment returns outside of the scheme would mean taking on more investment risk and/or investing in illiquid assets. Like-for-like, self-invested returns would need to also exceed all of the following: the reduction in CETV due to the funding insufficiency (the scheme’s assets fall short of its liabilities, and correspondingly lower CETVs are offered), the reduction due to initial charges, and reductions due to ongoing charges. They will be greater hurdles for those closer to retirement, where there is less time for funds to accumulate before drawdown.

Both BSPS II and the PPF offer an element of certainty with respect to pre-inflation retirement income. Outside of the scheme, members have the flexibility to tailor their drawdown profiles, but this comes with the risk of running out of money. This risk can be mitigated by purchasing financial products during retirement, although any guarantees will need to be paid for and in some cases might otherwise have been provided by the PPF or BSPS II. In scenarios where members enjoy a reasonably long retirement, inflation remains a risk - within the PPF and BSPS II there are caps (albeit different ones) on inflation-linked increases. The effect of changes in the cost of living on retirement planning must not be dismissed.

The benefits and risk of transferring out depend on members’ personal circumstances. Some of the risks are shown in the table in Figure 2.

Risk

Risk Averse: BSPS II/PPF

Risk Seeking or Value Flexibility

Investment

Relatively low-risk investments and hence modest investment returns

May be able to - in exchange for accepting more risk - obtain superior returns elsewhere.

Those returns need, all other things being equal, to exceed the following charges:

  • CETV reduction for funding insufficiency
  • Advisers’ charges (initial and ongoing)
  • Fund management charges (initial and ongoing)
  • Exit penalties (if need to draw down or move investments during penalty period, if any)

Initial charges and funding insufficiencies will be a greater hurdle to overcome for those nearer retirement.

Life expectancy/phasing

Protected against own life expectancy, subject to the standing of BSPS II and ultimately the PPF.

Can construct own drawdown profile, which can be compatible with more gradual patterns of retirement (for example, part-time working).

While post/during-retirement products can be purchased to provide some guarantees, outside of that there is a real risk of running out of money in retirement.

Inflation

The PPF and BSPS II offer, to differing extents, inflation protection.

In each case such protection is capped, meaning that, in periods of high inflation, spending power can quickly be eroded.

In each case, the inflation protection may not match members’ own spending patterns and remains an important consideration.

While it is possible to buy retirement products that may protect against inflation (such as index-linked annuities), these products may be perceived as expensive and may be subject to the same limitations as the protection offered by the PPF and BSPS II.

Leaving an inheritance to dependants.

Post-retirement, the PPF and BSPS II offer a 50% spouse’s pension in the event of the death of the member. In the case of the PPF this amount reduces to reflect any tax-free cash taken by the member.

Generally, in the event of death early in retirement, the funds remaining may exceed the equivalent cost of a 50% spouse’s pension and offer dependants more flexibility in the phasing - when funds are drawn - of those funds.

 

The range of options for those not near retirement requires qualified advice to navigate. For those strongly inclined towards the protections offered by defined benefits pension schemes and those in retirement, the range of options reduces. Individuals considering transferring out clearly need good quality financial advice. Unfortunately, as is well documented, there has been a problem with some of the advice being offered, particularly around transferring out.

The Financial Conduct Authority (FCA) has become very involved with providing seminars for advisers, writing to advisers explaining its expectations, issuing alerts to consumers about transferring out, and stopping a number of firms from giving advice. Hopefully, the actions of the regulators, information provided by the trustees, the intervention of Frank Field MP, and the advice given by good quality financial advisers will help the steel workers make the right choices for themselves. 

Colette Dunn is head of strategy and Russell Osman is senior consultant at Milliman