A ‘sensationalist’ Pensions and Lifetime Savings Association (PLSA) report on defined benefit (DB) funding has stoked demand, with advisers already using it to promote transfers.
A trade union has also told New Model Adviser® its members are talking about the reports’ claims. The 42-page PLSA report on DB schemes, which you can read here, included the line: ‘Millions of people’s retirement incomes are now at risk with approximately three million people in DB schemes having only a 50% chance of seeing their benefits paid in full.’
To address this problem, the PLSA called for the introduction of a superfund to make DB schemes more efficient and cost-effective, giving extensive detail of how this would work and the benefits for members and trustees.
The figure of three million DB members at risk instantly made it onto the front page of the Daily Express and other national publications, creating further public fear over DB funding.
The PLSA said it was not its ‘intention’ for the report to be used in this way. But New Model Adviser® has also found advisers using the three million figure as part of their marketing material around DB transfers.
There is a case to answer when it comes to employers’ ability to sustain DB funding, with more schemes falling on the Payment Protection Fund (PPF). But some have criticised the way the PLSA presented its findings, branding them ‘sensationalist’ and playing ‘fast and loose’ with facts.
Advisers were already pointing to rising DB deficits as a reason to transfer. In a communication to its advisers seen by New Model Adviser®, True Potential gave information about its DB transfer service. It said: ‘With over 5,000 schemes in deficit, the risk for many is staying put.’
Shortly after the PLSA report was released, one of the largest DB transfer specialists in the market, Tideway Investment Partners, put a banner on its website. This quoted the PLSA’s three million figure and a link to a Daily Telegraph article covering the report.
Joe Dabrowski, head of governance and investment at PLSA, said it was not the body’s intention for its report to be used in adviser marketing material.
‘There is a lot of nuance in the report that is hard to capture in a headline,’ he said. ‘Some of the headlines were perhaps a bit dramatic and there is always the risk that people can use dramatic headlines for nefarious purposes. But there was little we could do about how people take elements and run with them.
‘The key thing we were trying to indicate was many members face risk to their benefits that may or may not come to realisation. The proposals we are putting forward are intended to give people a much higher chance of receiving their benefits.’
Damage is done
However Neil Walsh, pensions officer at trade union Prospect, said some of his members are already referring to the PLSA report.
‘It’s unfortunate because I am sure the PLSA was intending to use the report to bolster its argument for a superfund,’ he said. ‘But of course, it will be used differently in the hands of those who have an interest in people taking transfers. So instead of it being used to bolster the case for a superfund, it is being used by advisers to push transfers.’
Walsh said the headline figure has little relevance to any particular member.
‘We know that some schemes have failed. But how on earth can an adviser be confident in telling them their own scheme is going to fail?’ he said. ‘It is one thing to say certain categories of firms have a chance of failure in their lifetime. But it is quite another thing to say your employer is not going to be there in 10 years’ time.’
Indeed, how many advisers are prepared to predict thousands of companies are going to go bust? How many would single out a company they think will go under?
There are currently 230,664 members in the PPF with average compensation of ust under £5,000. For three million more members to have a 50:50 chance of going into the lifeboat, there would have to be with a large recession.
According to the PPF, if the current rate of claims continues then 150,000 will fall on the lifeboat by 2030, far fewer than the PLSA’s predictions.
Digging into the numbers
The PLSA report used data from The Pensions Regulator (TPR) to assess the DB market.
TPR splits DB schemes into four covenants in terms of their funding. Covenant group 3 is characterised as tending to be weak, and 4 is weak.
TPR told the PLSA there were three million members in covenant groups 3 and 4.
The report highlighted many of these underfunded schemes are in industries which have been struggling recently, including manufacturing, and the DB schemes were set up when these industries were thriving.
The report used independent analysis undertaken by Gazelle Corporate Finance, which looked at schemes in different covenants.
‘Our analysis shows that over the next 30 years, schemes in the weakest solvency (CG4) have only a 32% probability of reaching full solvency funding [i.e. paying future payment in full to members] with those schemes in the CG3 category having a 52% chance of hitting this target,’ it said.
It is hard to determine the accuracy of this assessment, though TPR warned in May that 5% of DB schemes are in a situation ‘where it appears they are at risk of becoming unable to, or are already unlikely to be able to adequately support the scheme’.
But some have criticised the way the PLSA has presented the analysis.
‘I was fearful it would get picked up,’ said David Brooks (pictured above), pensions technical director at Broadstone Corporate Benefits. ‘I have heard people encouraging transfers talking about sponsors not affording their pension schemes and the PPF is going to collapse. So to have this from an official respected body was a bit fast and loose.
‘The PLSA is talking to the profession here so it doesn’t need to be quite so sensationalist in what it is talking about.’
Brooks said the general public believe they will lose their entire pension if the scheme fails. In fact, the PPF will support 90% of their pension, capped at £36,000.
Many clients come to advisers with a preconceived desire to transfer out, borne out by the problem of insistent clients.
Part of this is has been driven by media coverage of events, such as the collapse of BHS.
The Financial Conduct Authority recognised this in its recent consultation paper on DB transfer advice. It said: ‘Media coverage of pension funding problems and failure of particular DB pension schemes may lead consumers to overestimate the risk to their own benefits leading to a desire to transfer out to keep their money in their own control. Consumers may also underestimate the risk running out of money.’
The media can sensationalise the news. However, the PLSA’s report was doing this job for them.