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Transfers out of defined benefit (DB) pension schemes are clearly on the up. For scheme trustees, this can be tricky. It is important we don’t take the moral high ground and think pension members are incapable of making sensible decisions when tempted with a large transfer amount. Equally, we shouldn’t second guess the members’ circumstances and not permit an employer to run a transfer value exercise. A pension trustee’s focus should be on good communications that clearly articulate the risks involved with transferring.
What does the pension transfer world look like?
Low gilt yields have led to inflated individual transfer values (up to 45 times the pension being given up). Add to this media attention post pension freedoms and high profile people writing in the weekend papers about their own decision to transfer, and it isn’t surprising there’s a lot of interest from scheme members.
The Pensions Regulator (tPR) appears more relaxed about transfers. Whilst still saying the starting position needs to be members are normally better served by DB, tPR does seem to be catching up with the opportunities presented by pension freedoms.
Once again, we are seeing company advisers pushing for transfer value exercises. They are also reporting very high take up rates, even where enhancements not provided. I’ve seen figures of up to 50% take up quoted - should this be a concern?
Are pension members ignoring advice?
As a professional pension trustee, lots of questions run round in my head:
Clearly, independent advice must be taken where the pension transfer is over £30,000, and the cost advice is coming down. DB to DC transfers is still a sensitive area for IFAs, but they are becoming more confident in providing advice in this situation.
There are some obvious reasons why a DB to DC transfer may be appropriate. For example, the member has no spouse or their life expectancy is below average. Another advantage is, on the death of the member, a DC pot can transfer to heirs, whereas a DB pension would simply cease if there were no qualifying dependents.
That said, there is evidence members are proceeding with transfers even when advised it is not in their interests. These ‘insistent clients’ are typically going ahead even though the critical yield is insufficient to produce investment returns to fund the DB pension being given up.
On a more positive note, it seems some members are not taking all their pot as cash at the earliest opportunity but are being sensible with drawdown plans and using the flexibilities wisely. However, I can’t help but wonder whether the prospect of a pot of cash now that appears large against the pension being forfeited is tempting members to make poor decisions.
Where do pension trustees fit?
There are lots of considerations and concerns facing the trustee of a defined benefit pension scheme. Here are just a few of my thoughts:
Member communications are critical and need to be reviewed carefully. They are often written by the company’s advisers, but I think pension trustees should own the process as much as they can to ensure:
Recent experience appears to be that transfer value exercises have had high take ups. Whether or not this is a good thing for members, will it help ease the current pension funding challenges? And could this be another mass miss-selling akin to the 1990’s personal pensions debacle? I guess a difference is in today’s robust FCA regulations…