The Financial Times leads on the story that the scale of pension cash transfers out of defined benefit schemes and into defined contribution plans nearly trebled during 2017 to £20.8bn, up from £7.9bn in 2016.
New figures from the Financial Conduct Authority show that there were 92,000 transfers from DB to DC schemes were reported last year — 50% more than the 61,000 reported in 2016 – and that the fourth quarter of 2017 alone saw £5.5bn of transfers, compared with £2.5bn in the same quarter of 2016.
The FT’s quotee, a former FCA board member, says that in his view this increase is a particularly worrying development, especially considering that previous FCA reviews found that only about half of all DB to DC transfers “could be shown to be suitable.” And that “large jumps in volumes of sales should alert regulators to an increased risk of mis-selling”
The FT is clear that pension investors have had their heads turned by the very high transfer values that were being offered last year – and it also points out, a little obliquely, that interest rates were very low. Here at IFA Magazine, we would probably be more inclined to observe that very low (but rising) bond yields had forced up the capital sums that would have been required to guarantee DB income values, and that the low yields were felt to be offering a one-off timing opportunity in the face of probably lower values in the coming year. It will be interesting to see how this one shapes up in a higher interest rate climate.
Money Mail has more gloomy news for retail sector investors, with a story about how the number of retail group insolvencies rose by 50% during the first quarter of 2018. Although Toys R Us and Maplin were making the headlines (together with House of Fraser’s attempts to get its rents reduced), data from the credit checking agency Creditsafe showed a total of 327 retail failures recorded in the first quarter of the year. And employment levels are said to be down by 13% year-on-year.
The Mail says that new official figures due this week are expected to show a 0.9% rise in retail sales for April, partially reclaiming the 1.2% loss from foul, rainy March. But Monday’s Mail subsequently piled on the gloom with a report that hedge funds are aggressively shorting Marks & Spencer, in a move that may force it out of the FTSE-100 index.
M&S, the Mail says, is due to publish its annual results shortly, and the market is bracing itself for another drop in annual profits – as well as perhaps another 40 store closures in addition to the 60 that have already been announced. There are particular fears, it says, that the M&S food operation may have fallen into decline.
Three cheers, then, for food retailer Sainsburys, which appears to have the market’s confidence for its plan to merge with Asda, currently owned by America’s Wal-Mart.
Writing in the Financial Mail on Sunday, Jeff Prestridge gives a warm welcome to the news that Guardian, the new kid on the block in the world of insurance, is to launch a revolutionary financial protection insurance policy.
The new policy, he reports, is set up as critical illness cover – designed to pay out a tax-free lump sum on diagnosis of a serious illness or the incurring of a major disability. But what makes it special is that the cover will not be set in stone – as happens with conventional critical illness policies. Guardian, owned by Gryphon Group, has promised that when claim wordings are improved, as they regularly are, they will be applied to existing policies, not just new plans (as happens now). If the upgrade results in a premium increase, Guardian will offer policyholders a choice: stick with what they have got or twist to the upgrade. It sounds good to us at IFA Magazine too.
The MoS’ fund focus column looks at the Aurora Investment Trust. In 2016, Phoenix Asset Management was appointed as manager to the trust. MoS reports that since then they have focused the portfolio around a tight group of mainstream UK companies which it sees as capital light yet high return companies. The article highlights the trust’s performance as having been better than its peer group and the FTSE All Share since 2016. It also highlights the fact that Aurora is not designed for income seekers and and that its stance on charges is bold. Although there are ongoing charges, Phoenix does not earn an annual fee from running the trust unless it outperforms the FTSE All-Share Index. So the incentive to deliver superior returns is a strong one. As Prestridge comments, so far, so good by the looks of it.
Sunday Times Money leads with a full page report that some mortgage lenders are increasingly happy to lend to borrowers in their seventies and eighties – an alternative to equity release for those who want to maximise the amount that is passed on after their death. It tends to be smaller banks and building societies which are getting involved in this area. The loans are usually interest only, with capital repaid from the ultimate proceeds of the sale of the property. The report suggests that interest payments are lower this way than going down the equity release route, although it stresses that the mortgage holder/s must be able to show they can afford to make the repayments.
As we reported above in the FT article, pensions mis-selling is also on the agenda for the Sunday Times again this week, as they report that the FSCS has paid out a total of £318m to 10,900people over the past five years, “after their investments went bad and the firms that advised them subsequently went bad” and that “much of the compensation has gone to pension savers who withdrew their money from defined benefits schemes and reinvested it through a SIPP in high-risk, unregulated schemes” it reports the FSCS as saying. Clearly, the problem of switching from DB schemes is something which advisers are all too aware of, although headlines like this might inadvertently cause some concern amongst clients with SIPPs who may not fully understand the rather significant difference between their own circumstances and these unfortunate cases reported in the media.
Meanwhile, in his Personal Account column, Ian Cowie is warning investors not to be too dazzled by a strong yield on an individual share. Instead, he wisely suggests that it is shares with modest or rising dividends which tend to deliver the greatest total return over time. He talks readers through the largest holdings in his personal account, with a look at the yield generated from each. It’s a good read but unlikely to trigger any awkward questions from clients.
Landlords exiting buy-to-let market due to problem tenants and punitive legal system. That’s the headline in James Conington’s lead story in the Sunday Telegraph Money section. He reports that changes to the buy-to-let tax regime are hammering landlords’ margins, yet many are considering leaving the sector not due to the profit squeeze, but because of problem tenants. Apparently, a third of landlords experienced rental arrears, with the average amount owed totalling £1,650, over the year to autumn 2018, according to the Residential Landlords Association, a trade body. This is a 4.2pc increase on a year earlier. Also, one in four landlords has faced large bills when tenants have left properties in a damaged state, and 16pc have had tenants refuse to leave at the end of a tenancy, according to research from letting agent MakeUrMove. A third of landlords polled said they could be forced to sell up due to problems with tenants. With many clients seeing buy-to-let as an attractive option, it’s a sobering thought to see how the reality can be very challenging indeed for private landlords who aren’t properly prepared to deal with things when they go wrong.