In turbulent times, when the future of a company is being called into question, it is not uncommon for staff to transfer out of their employer’s defined benefit (DB) pension scheme, if they have one.
Although seen as “gold-plated”, some DB scheme members worry about their scheme falling to the pension lifeboat fund, and that they will lose money as a result.
This has been the case at British Airways in recent months. Pilots in particular have been transferring out of the scheme for a number of years and for a variety of reasons, however in the last year, when the coronavirus hit airlines particularly hard, the viability of the company became another factor for those considering transferring away from the pension.
But leaving a DB scheme is considered a risky move, and in recent years the City regulator has taken a hard line on the subject, making it clear that almost all employees should stick with the increasingly rare DB schemes, rather than transfering out of it.
“The decision to transfer out of a DB scheme is a complex one and we remain of the view that for most people a transfer out of a DB scheme is unlikely to be suitable.
“However, the number of consumers receiving a recommendation to leave their DB scheme has been consistently too high,” it wrote on its website.
It can also be an extremely expensive endeavour. Management fees on large sums of money transferred from a DB scheme can be eye-watering, cutting chunks from money earmarked for retirement.
Just last month the Financial Conduct Authority issued yet another update on the DB space, again pointing out that some firms are still “struggling to give consistent, suitable advice”, and that too much of the advice it assessed was unsuitable.
Those who choose to transfer from a gold-plated scheme are giving up a guaranteed income for life in favour of the flexibility of a private pension, meaning the money is at the mercy of stock market ups and downs, poor investment choices, or poor money management.
Million pound pensions
The British Airways Pension Schemes have seen a steady stream of members transferring out in recent years, though when contacted by City A.M., BA pensions refused to give any precise figures on the number of members transferring.
Members of the schemes include pilots and officers, often with DB pots running into the millions of pounds, cabin crew and general staff. Most of the 85,000 scheme beneficiaries are in BA’s New Airways Pension Scheme (NAPS).
One pilot said around 80 per cent of pilots who are in the now-closed-to-accrual NAPS are considering transferring out, or have already done so. “I can’t think of the last time I went to work when someone was sure they were staying in the scheme,” he added.
Transferring out of the pension scheme has been something pilots in particular have talked about and acted upon now for a number of years. But recently, and despite the general advice from the regulator, pilots have been weighing up leaving the scheme for fear the flag carrier or its overall owner IAG goes bust, after the coronavirus pandemic grounded planes and left airlines losing billions.
However, British Airways has fared better than its rivals, some of which have looked in danger of collapse or have asked the government for bailout loans. BA also recently bolstered its finances with a £2bn loan deal.
BA Pensions has been approached for comment.
Al Rush, a financial adviser who has campaigned about DB transfers in the past, said many of the stories he had heard from pilots who transferred from their DB pension centred on “the mistrust of the employer and the trustees and the schemes”.
One pilot who spoke to City A.M. admitted his decision to leave the scheme had been driven by emotion, and in fear that British Airways would collapse: “I was concerned about having the golden egg, and that someone might shoot the golden goose,” he said.
The City regulator stepped up its work in the DB transfer sector after hundreds of steelworkers were mis-advised to transfer out of their DB pensions a few years ago.
Financial advisers targeted the steelworkers and capitalised on fears that their DB pension would fall to the Pension Protection Fund. Many of the advisers involved were ultimately banned by the FCA from carrying out regulated activity, and their companies – all small, local firms – buckled under the weight of compensation claims when it became clear they had given poor advice to line their own pockets.
Pilots are acutely aware of the regulatory hurdles they face trying to access their cash, and have come up with ways to game the system to ensure they get the go-ahead for the transfer.
“I’ve been through the justification process of a transfer,” said one. “You just have to say the right thing and have the right attitude to risk.
“We’ve been aggressive buyers. I understood that if you didn’t have a high tolerance for risk, they couldn’t approve it. It’s almost like taking an exam.”
St James’s Place
Due to the FCA’s activity in the area, there are now fewer financial advisers offering the transfer service, meaning the market is populated largely with a number of big firms that are able to pay the costs of ever-rising professional indemnity premiums in the area, leaving consumers with fewer choices about who to go to if they want to transfer their pension.
Advisers still operating in the market include giant St James’s Place (SJP), which City A.M. understands has worked with BA pilots, some of whom are still in their 40s, to transfer out of the scheme.
SJP has a long-term working relationship with BA, including holding seminars for BA pilots that cover a range of pension and tax-related subjects, including DB transfers.
One mid-career who transferred his whole pension with SJP had only good things to say about the wealth manager, though he acknowledged: “Most companies won’t touch you under 50.”
Rush, who helped obtain compensation for the mis-sold steelworkers, said the further away an individual is from retirement, the it is harder to justify a transfer.
“The reason for that, simply put, is that it is so much harder to see into the future and identify future events and circumstances which could conspire to hinder and jeopardise an otherwise happy retirement,” he said.
“The longer a timeline is, the thinner and weaker it has to be, so from an advisory perspective, the more years that the client is from retirement, the far more cautiously you must proceed.”
Rush said that a client in their 40s should generally only transfer if they have a terminal illness, or if they have significant other financial holdings.
“The stories that I’ve heard [from pilots] is very similar to the stories surrounding the British Steel pension scheme, Rush continued. “Much of the advice centred on so-called flexibility, death benefits and erroneously played on mistrust of the employer and the trustees and the scheme itself.”
The mid-career pilot said most of his colleagues who had transferred had done so via SJP.
“They’re not for everyone,” he continued, “and some of the guys went to Hargreaves Lansdown and Delta Financial. I think SJP were really good.”
St James’s Place said it maintained a “cautious” approach to DB transfers, and started from the position that for most people retaining the benefits of a DB scheme would likely be in their best interests.
The financial advice giant said all recommendations to transfer are checked by qualified pension transfer specialists that operate independently of its advisers, known as ‘partners’ at the firm.
“For the vast majority of completed transfers, the clients will be aged 55 or over and at retirement. However, there will be still be occasions where a transfer is in the client’s best interests even though they are further from retirement. For example, a partial transfer, which is now permitted under the BA scheme,” SJP said.
As for its charges, SJP said the maximum initial advice charge for DB transfer advice is 4.5 per cent – a non-contingent charge that, as per changes made by the FCA, is payable whether the person receives advice to transfer or not – which also covers the cost of all advice on the transfer, including advice on establishing the pension plan and the investment strategy used. SJP then charges a maximum ongoing fee of 0.5 per cent per annum.
SJP also charges an initial product charge of 1.5 per cent on top of the 4.5 per cent and an annual product management charge of one per cent, which is waived in the first six years, plus any additional charges for managing the underlying investments.
The pilot, however, who transferred before contingent charging rules were put in place, believes he is being charged roughly 1.5-2.1 per cent on his pension each year. With a pension pot running into the millions, a conservative estimate would mean he is paying £30,000 per year in fees, and being in his 40s, he has a while to go – and plenty of fees to pay – before he can access his pension.
Another pilot said he understood that, from a regulatory point of view, staying in the DB scheme was the safest option, “but from a personal point of view, with education, and a capacity for loss, it’s a shame that some of the bad actors have basically shut the door on what could be a good situation for people.”
Pay day for asset managers
Despite the regulator’s crackdown, and insistence that DB transfers are not for the majority of people, asset managers are still making a fortune each year from those transferring out of their gold-plated pensions.
AJ Bell, SJP and Royal London increased their overall share of the DB pension transfer market dramatically in 2020, with more than a third (37.5 per cent) of all transferred amounts going to them, according to research by consultancy LCP.
SJP in particular increased its market share last year. For every £6 transferred out of a DB pension scheme administered by LCP, £1 went to SJP, and more than a quarter (26 per cent) of all transfers were carried out by the wealth manager.
DB transfers are no doubt risky business, but they are appropriate for some people in the right circumstances, and have “very possibly” been overly vilified, according to Rory Percival, an ex-technical specialist at the FCA turned consultant.
“Most of the advisers who are still in the market, hopefully, are on the right page,” he said. “[But] there tends to be overemphasis on flexibility, death benefits and having excess capital [as a reason to transfer]. It’s a big temptation for customers and advisers, especially advisers who then manage the money [after the transfer],” he added.