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The BBC's planned Pension Increase Exchange (PIE) (Read 18630 times)
ianpollock
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The BBC's planned Pension Increase Exchange (PIE)
Oct 6th, 2015, 7:36pm
 
I received a letter from the BBC (not the pension scheme) on Saturday, introducing its forthcoming plan to offer many pensioners the "opportunity" to forgo future inflation-linked pension increases (in part or in whole) in exchange for a higher level of pension right now. No details were spelled out, but apparently it is going to be aimed at nearly 17,000 pensioners who had earned pension pre-1997 - in other words, mainly former staff who were members of the Old Benefits section of the BBC scheme. If you received such a letter, what do you think?
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The Badger
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #1 - Oct 6th, 2015, 8:11pm
 
I would presume this is a clever (?) attempt by the BBC to reduce the pension deficit. Clearly the actuarial cost of an index linked pension is somewhat more than a flat rate one. If you can "persuade" pensioners to swap at a cost that is less than the difference for the BBC's liability then - BINGO - deficit is reduced. I could have a very interesting meeting with those financial advisers I reckon !
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #2 - Oct 7th, 2015, 6:56am
 
One wonders whether the "lump sum" one off pension increase that will be offered to a pensioner will be different for differing age groups, their sex, depend on where he or she lives ie how long they may be expected to live and how much actual pension they are receiving at the present. How will the financial advisor predict what the RPI may even "do" over the coming years. All very much up in the air at the moment.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #3 - Oct 7th, 2015, 7:54am
 
One needs to remember that the financial advisers are being paid by the BBC. Clearly this is an "insurance policy" by the BBC to avoid accusations of mis-selling or similar further down the line should something happen in the future (like 15% p/a inflation) and pensioners start screaming about their relatively worthless "increased flat pension" !

In the realms of the law it used to be forbidden for one side to provide the lawyer for the other side. No such sensible arrangement applies to the area of so called financial advise. How about starting off with the pensioners affected by this insisting that the BBC pays for their own choice of independent financial adviser and not be bound to take the one the BBC has chosen. It would also be rather more satisfactory from the point of view of confidentiality of ones full person financial and other circumstances. Do pensioners really want to disclose all that information to some firm working under contract for the BBC who clearly have a vested interest in the outcome going in one particular direction ?

In conclusion - Independent Financial Advisers chosen by the pensioners but paid for by the BBC, NOT the BBC's chosen adviser.

Edited for spelling error.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #4 - Oct 7th, 2015, 8:14am
 
Just had a quick look round on google , got this from Hargreaves Lansdown:

100K Pension pot buys, 70y old:

SingleLife,5y gtee, flat annuity= £6639 p/a
SingleLife,5y gtee, RPI annuity = £4043 p/a

So by my reckoning the BBC would have to offer in this example just over a 64% increase to have the deficit unchanged. If they offer you less than a 64% increase they will be "in the money".

Of course I am not a financial adviser or actuary so I stand to be corrected on this ! But as a ball-park I doubt I am very far out. Might just give my old financial adviser a call and have a quick chat - will report back later.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #5 - Oct 7th, 2015, 12:26pm
 
My friendly IFA had quite a bit to say about this, first interesting comment (I think his brother is an Estate agent);

"There are 4 things that determine the calculation of the value of an index linked pension; Inflation, Inflation, Inflation and Inflation".

Obviously it is a bit more complicated than that but this gets the message across and leaves you, me, the BBC and Chase de Vere stabbing pins into a chart to determine what said inflation will be for every year of the rest of the pensioner's life.

Uh uh. I know what you're thinking. Did inflation average 6% or 5% over the last 20 years ? Well to tell you the truth in all this excitement I kinda lost track myself. But you've gotta ask yourself one question "Do I feel lucky ?" Well do ya, pensioner ?
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The Badger
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #6 - Oct 7th, 2015, 12:59pm
 
Here is an interesting news article about PIEs from 2011. It's from a reputable and well known organisation and explains how they are generally considered a bad option for most pensioners, note also the comment about IFA advice on PIEs being an unregulated area.

http://www.bbc.co.uk/news/business-13640107

And also have a look at this;

http://www.ipe.com/news/funding/bbc-scheme-seeks-to-cap-inflation-increases-with...


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ianpollock
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #7 - Oct 7th, 2015, 1:21pm
 
My reading of the BBC's letter suggests that the offer would involve not the payment of a lump sum to us, but a permanent uplift in our monthly pensions. Obviously we await details. I had a look at the inflation statistics on the ONS website. They show that from 1991 to 2014 inclusive, the average annual RPI inflation rate was exactly 3%. But that annual inflation rate rose above 5% in 21 different months, mainly back in 1991 and around 2011. The ONS's separate calculation of the RPI for two-person pensioner households shows that inflation, for them, was above 5% in 14 different quarters, or 42 months in total; in other words for 15% of that timespan (1991 to 2014 inclusive). It seems that if recent economic history is anything to go by, the chances of inflation rising above 5% at some point in the next 24 years are quite good.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #8 - Oct 7th, 2015, 1:39pm
 
As current annuity rates show a higher starting annual pension with a 3% p/a escalation compared to an RPI linked pension (for the same pot) we can conclude that the annuity providers are expecting RPI inflation to average over 3% long term. However one thing to remember is that whatever the RPI  your index linked pension is guaranteed to keep up whereas a flat rate , but higher, pension will only be a better deal in certain specific, and unpredictable, circumstances. I think that is what people call "gambling" (What do IFAs call it ?).
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #9 - Oct 7th, 2015, 2:07pm
 
Maths not my strong point, but my pension appears to have gone up some 57 per cent since I retired in 1999. That's a helluva benefit to give up.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #10 - Oct 7th, 2015, 2:52pm
 
That's a fantastically good point. If you give up inflation proofing entirely, you not only forgo each year's individual rise, but also the compounding effect of each year's successive rises. For instance, pension increases each year of 4% for 17 years would double the value of your starting pension. £10,000 would rise to just under £20,000. An alternative way to look at it is this: if your income were frozen at £10,000, but inflation rose at 4% every year for 17 years, the real value of your (frozen) pension would be halved. Meanwhile 3% inflation every year would halve your frozen pension's real value after 23 years.
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #11 - Oct 7th, 2015, 3:06pm
 
This site includes a recent review of the fund. (30th September 2015)

"The £12.9bn (€17.6bn) BBC Pension Scheme returned 20.1% over the year to April, backed by its exposure to long-dated UK bonds and global equities.

The pension fund for employees of the UK’s public broadcaster, however, said the long-dated bonds, while adding to performance, also hampered the scheme’s ability to meet its 2026 funding target."
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #12 - Oct 7th, 2015, 4:31pm
 
I suppose a large part of the personal decision making process will rely on the age of the pensioner. The younger they are the more chance of the fixed pension being eroded by inflation over time.

In this age of low inflation it could seem however a "no brainer" to turn down an immediate increase (in the short term). However even the BoE have said that the economy requires an element of inflation.

On the face of it and with no figures mentioned at this early stage I think as has already been said, history shows that inflation is a fact of life, so I think if I were offered it (no letter yet) I would have to say "I'm out" particularly as the my pension is tied to RPI.  

I wonder what the requirements are to be considered for PIE?
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #13 - Oct 7th, 2015, 7:26pm
 
See;

http://www.ipe.com/news/funding/bbc-scheme-seeks-to-cap-inflation-increases-with...

This seems to indicate that the offer is to be made to 16,900 existing pensioners (Old Benefits Scheme only ?) but there is a comment later about those over 80 might be offered it so it is a little unclear. I would guess therefore that initially those over 80 might be excluded, perhaps because the increase to be offered would look quite small in % terms owing to the expected term to death (lovely phrase !) being quite small hence the potential gain to the BBC being similarly tiny.

Many other companies have gone down the PIE route, you can search around the www for some background info. Here is one from BT with a case study;

http://www.btpensionersreconnect.co.uk/Pension%20Increase%20A%20Case%20Study2.pd...

Note in that case the increase offered was less than 20% although complicated by a partially indexed bit.

Here is a KPMG document aimed at companies. Note the term "Balanced Deal Percentage".

https://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/...

Here is a link to what the Pension Regulator has to say.

http://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx

I draw your attention to this section;

"Risks associated with incentive exercises

Where a member accepts an IE offer, an employer’s pension liability or risk is likely to be reduced. Conversely, for members the risk that they will suffer a loss in the long run will usually increase if they accept an offer. Losses could be due to factors specific to the individual (eg life expectancy or investment choices) or the overall economic and market environment in future. An IE offer is often set at below ‘cost-neutral’ terms in order to reduce an employer’s pension liabilities, and in this situation there is a heightened risk that members will be worse off.

A minority (and, very possibly, a small minority) of members may have personal circumstances which result in them being in a better position through accepting an IE offer

IE offers can create risks for trustees and employers as well. These include legal and reputational risks materialising many years after the IE has taken place.

IEs can be costly. There is the cost of the incentive itself. Also there is a cost to obtaining advice (legal, financial, and actuarial). Designing IEs to meet appropriate standards (including those in the Industry code), can present significant challenges which come with a cost implication."


Oh dear, it is all getting very heavy and technical isn't it . Finding it hard to take all this in ? Would a pretty coloured diagram help ? Here you go !

http://beaufortconsulting.co.uk/pietest/key-considerations/your-health-and-life-...

Simples ! all you have to do is work out whether your life expectancy is average, better than average or worse than average. Undecided















Edited due to broken link.
Edit2 added KPMG document link
Edit3 added link to government pensions regulator +copy  text
Edit 4 added link to pretty coloured diagram
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« Last Edit: Oct 7th, 2015, 9:12pm by The Badger »  
 
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Re: The BBC's planned Pension Increase Exchange (PIE)
Reply #14 - Oct 8th, 2015, 10:50pm
 
Here is the Tender Document which the BBC sent out in June 2015 seeking quotes for the provision of the independent financial advice to members over the PIE exercise (and also a FRO offer for active & deferred members).

http://www.sell2wales.gov.uk/Search/Search_Print.aspx?ID=JUN090511

The following points are noted by me:

1) Offer is to potential 16,900 pensioners aged under 80. A further 4,900 over 80 will also be written to but have to "opt in" to receive the offer (this is due to government guidelines on "vulnerable" persons).

2) Offer excercise commences 1/11/15 but is split into 2 tranches the second starting 1/12/15 and each tranche runs for 3 months.

I interpret that as effectively the pool of pensioners will probably be split in half and you can expect to receive your offer documents either at the start of  November or December. There will then be 3 months for the individual personal consultation with the financial advisers to take place.

3) BBC Expected interest in offer rate 60-40% of pool. Expected take up 40-20%.

4) BBC estimate of Tender Value for Financial Advice £3M to £7M.
My calculations:
Assuming 50% of total 16,900 and 20% over 80s gives a total of 9,430 financial consultations giving an average cost of £318 (£3M) to £742 (£7M) per pensioner.

It will be interesting to see how close the actual events come to this and I would think it is reasonable to ask the BBC to disclose the figure they are paying to Chase de Vere under the tender. Under the government guidelines for PIE offers it says the reasons for the exercise should be made clear to the members and the financial interests disclosed. The initial letter from the BBC certainly seemed to me to be a complete fail on that to start with ! In fact it tries to present the PIE as a "look what we have got for you" offer and nowhere tells the truth that it is a "we want to reduce the BBC's pension fund liability/deficit". Rather a poor start I fear. Will the offer letter be better in this respect ? Will it comply with the guidelines ? We wait with interest !

The pensions regulator guidelines document is about 32 pages long I think, I will try to highlight some sections for you all a bit later this month. Link coming shortly for those who want to read the whole thing.

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