I read a previous response from you regarding the collapse in the cash equivalent transfer value of private pensions.
I have a defined benefit pension and have been affected by this, having seen a fall from £600,000 to just over £300,000.
With all due respect, your previous response did not address the key issue. Fine, the annual pension is not affected, and it is true that you may be able to obtain a higher annuity – but in my case this has ruined my whole pension planning.
I was going to transfer my pot into a Sipp to have flexibility of draw down income, and I would have been receiving interest of almost £30,000 per annum. This has all now gone.
‘Scandal’: Our reader thinks his pension provider has been negligent, because it did not inform him that his fund’s value was closely linked to interest rate increases
In my opinion there has been mass negligence within pension funds. Nobody had any idea how highly geared towards interest rate increases fund values were.
Why did the pension fund not have an obligation to warn me in clear and unequivocal language about the underlying funding mechanisms of my fund, and how they were so adversely linked to interest rate increases?
I think it is a scandal that the government failed to put adequate legislation in place to protect people like me.
I would appreciate advice on how to progress this matter.
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Steve Webb replies: The primary role of the trustees of your defined benefit pension scheme is to make sure that your pension is paid in line with the rules of the scheme.
Over many years they will have run an investment strategy designed to make sure that there is enough money to pay your pension through your retirement.
Your employer will also have been making contributions, often topping up the scheme if market movements or other factors, such as people living longer than expected, mean that the fund might otherwise have been short of what was needed to pay all the pensions.
From what you have described, there is no evidence that the trustees of your scheme have failed in this duty.
Instead, what has happened is that dramatic economic shifts, and in particular the sharp rise in interest rates in the last year or so, has affected the cost of providing the very valuable guaranteed benefits which the scheme is committed to pay you.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
These shifts in economic conditions have had a big effect on the ‘cash equivalent transfer value’ (CETV) which the scheme will offer you in return for giving up your rights under the scheme.
In simple terms, the way a CETV is worked out is that it measures how much money the scheme has set aside to provide your pension.
In a world of low interest rates and low returns, the scheme needs to invest a lot of money now to pay your pension at retirement and potentially for decades thereafter.
But, when interest rates are higher, the scheme needs less money now because it will get a better return on the assets it holds. This means it saves less money if you choose to transfer out of the scheme.
I appreciate that this is very frustrating for you given that you were planning to transfer out.
But it is worth saying that the ability to transfer out under ‘pension freedoms’ and enjoy extensive flexibility after a transfer only started in April 2015.
Your pension scheme had probably been running for decades before that date with the primary purpose of planning to pay all scheme members a guaranteed income at retirement.
It would have been very odd if the trustees had suddenly decided to change the investment strategy of the whole scheme just because a small minority of members might now want to transfer out.
Indeed, the large majority of members who did not transfer out might well have objected if the strategy of the scheme had been focused on those who planned to leave it.
For several years after pension freedoms were introduced, interest rates were exceptionally low for an unusually long period, and during that period transfer values have been at record levels.
Had you transferred out during that period you would have enjoyed a relatively large transfer value, though coupled with relatively low returns post-transfer.
Instead, if you transfer out now, you would be offered a much lower transfer value, but coupled with better returns post-transfer. None of this indicates that your defined benefit pension scheme was badly run.
Thinking finally about whether the scheme should have done more to communicate all of this to you, again I’m not convinced that there was much more that they could or should have done.
Prior to taking a defined benefit transfer, it would have been mandatory for you to take financial advice, and the rules say that your advisor would have to start from the presumption that a transfer out would not be in your best interest.
This doesn’t mean that they could not advise a transfer, and it doesn’t mean that the answer in your circumstances may not be different.
But it does give another reason why trustees of your scheme are highly unlikely to be found guilty of maladministration for not doing more to flag the possibility that their previously high transfer values could fall considerably in the future.
The scheme clearly could not speculate on the future path of transfer values, and any CETV is quoted on a time-limited basis, precisely because market conditions can and do change.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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