The subject of defined benefit (DB) transfer values has always been controversial. The pensions freedoms introduced in 2015 made DB transfers more acceptable but there is still some uncertainty about whether or not individuals choosing to transfer are making the right decision.
The current climate creates some positive and negative aspects of transferring defined benefits for each of the parties involved.
Transfer values are at an all-time high, valued at 40-50 times the pension being transferred (in comparison to 25 times in the past). An article by XPS confirmed that transfer values ‘rose to record highs during June, which means a transfer will be increasingly tempting’. Pension scheme members are likely to get good value on transfers, with low interest rates and high inflation.
An important consideration will be how to invest the money in the new arrangement, to minimise risk. There is significant market volatility as a result of Covid-19 and members may easily lose any ‘value’ from a high transfer if the funds are invested in assets that then lose value. Financial advice is more important than ever.
Members may have a number of pressures in the current environment and wish to access funds quickly or look to maximise available funds. This could make them more susceptible than ever to pension scams.
It is, therefore, important that trustees monitor transfer requests and carry out due diligence on any transfer requests.
Trustees also have to consider scheme funding. If Covid-19 has reduced funding levels then it may be appropriate to commission an insufficiency report to reduce transfer values and ensure members are getting no more than their share of scheme funds.
Market volatility has resulted in unstable funding levels. In times of extreme volatility trustees may wish to utilise the three-month legislative window for issuing transfer values to ensure these are not being issued when abnormally high, which will impact on funding and equal treatment.
The Pensions Regulator has advised trustees to issue additional warnings to members at this time – to advise that a transfer may not be in their best interests and that they think carefully before making a decision. These warnings aim to help avoid the scenario where members fall foul to scams, and/or make detrimental financial decisions in the current climate.
Communication is key
Overall, it is important that trustees communicate with members to ensure that they understand the legal ways in which they can access their benefits, should they need to do so. If a member would like to consider a transfer value, giving access to paid financial advice can streamline the process although this may not always be available/affordable. It is worth noting that from 6 April 2017, legislation was amended to introduce a statutory exemption of £500 in a tax year for relevant pensions advice provided to employees. Under this exemption, if an employer provides pensions advice to its employees, or pays or reimburses the costs of pensions advice incurred by the employee, the cost of this advice can be exempt from Income Tax.
Trustees should also have access to daily funding levels to check funding in times of volatility and make decisions in a timely manner. Online member applications are also helpful to give members access to real time information on their benefits and options.
It is worth stressing again that more than ever, communication is key to ensuring members are aware of their options and are able to make well considered decisions.