Posts Tagged ‘Bulk Transfers’

David Davison

Rarely a day goes by without some press comment on the use of Enhanced Transfer Value Exercises as a legitimate (or not!!) form of final salary pension scheme de-risking. So we thought we’d get some informed comment from someone who actually has experience advising members on these exercises. Our guest contributor, Matthew Smith, is a highly experienced and qualified financial adviser, with leading Independent Financial Advisers Argyle Consulting, who has carried out a number of these exercises and outlines here what he considers are the real issues and choices members face.

(Argyle Consulting Limited is a leading firm of Independent Financial Advisers based in Scotland.)

Sponsoring final salary schemes is a pretty thankless business, and with a limited number of options open to employers to manage liabilities, an Enhanced Transfer Value (ETV) exercise conducted in an open and professional manner with employer funded IFA advice, remains an option worthy of serious consideration.

This is despite the entirely valid opprobrium heaped by the Pensions Regulator (among others) on some reported exercises that have bordered on sharp practice by employers at best.

Apart from the criticism of patently poor procedural conduct, there’s an undercurrent of hand wringing which seems to based on 1) that members need to be protected from themselves (and the big bad employer!) and 2) that there’s no way Joe Average can really understand or assess the value of the guarantees they are giving up.

It’s certainly not an IFA appetite for reckless endangerment which is encouraging members out of schemes.  The pensions review of the 90’s may be a fading memory, but final salary transfers remain the highest risk business an IFA can conduct from a regulatory, reputational and business survival perspective.  Get it wrong and you won’t be around for long!

As an IFA it’s meeting the personal objectives of the individual, not the protection of the many that gives a different starting point to our view, ever mindful of the fact that all transfer advice must start from the FSA stance that it is not in a member’s best interests to give up any guarantees.

But if the prevailing message from regulators is ‘beware of employers bearing gifts’ which right thinking member would take such an offer anyway, and why?  How can these exercises be done effectively for the employer, with proper governance and protections, and be balanced and not misleading to members?

Despite what the actuarial modelling might forecast about the value of the guarantees implicit in a final salary pension promise, each member places an entirely different ‘value’ on the real benefit of these guarantees to them, depending on their personal circumstances.

A few (real life) examples that can be taken in conjunction with a fair transfer offer and sensible critical yield would include early access, for example, the redundant employee in his 50’s who has been unable to find another employment and has used his lump sum to fund a business start-up.

Members do tend to underestimate their own life expectancy but the single member who is not in robust health is another example where a transfer giving up dependents pensions and possible increases can make sense.  Conversely the married member with a large pension entitlement from their spouse may feel no need of the guarantees or dependents benefits.

The reality is most members who decide to transfer with the benefit of balanced professional advice make an entirely rational decision on the basis of control of funds and greater immediate or future access flexibility.  Retirement is changing and pension entitlements for many deferred members are small and inflexible in relation to their other earnings, assets and entitlements, and are valued as such.

Much of the unease seems to be that somebody out there is duping Joe Average into thinking he’ll get a better pension on the basis that it’s an enhanced offer, rather than the reality which is that members in properly conducted exercises are making an informed choice to opt to transfer out of schemes in most cases for greater flexibility and control.

It’s not all about the numbers, and members are quite capable of making the value judgement, as long as a sophisticated professional adviser is explaining the issues to them in a way they can understand.

For employers thinking of spending the money on an ETV exercise our advice would be:

1) Make a fair offer, this is not a cheap option and setting enhanced transfer values that don’t get past the first base of a low critical yield to allow members to have a chance to transfer is a waste of everyone’s time.  Don’t offer cash, it’s difficult to assess its real value and could be regarded as an unfair inducement.

2) Engage with and appoint an IFA firm that has the relevant depth of technical experience, staff with the right qualifications, a robust process, and crucially the individual member communication skills to engage members at a high level on what can be a complex decision.  This will be critical to the success of any exercise and also to help reassure your trustees.

3) The employer needs to fund properly for the communications and member advice, and allow the member sufficient time with the adviser for decisions to be made. Members won’t transfer if the advice is generic or feels impersonal.

Sponsoring employers should not shy away from considering the merits of an ETV exercise, but the involvement of an experienced professional IFA practice at an early stage is critical to ensure it is money well spent.

David Davison

I read with interest the comments made by TPR Chairman David Norgrove about the use of transfer incentive exercises, Mr Norgrove suggests that trustees should become heavily involved in policing such exercises. He also suggests that trustees’ default position should be to treat exercises with scepticism and asserts that they are unlikely ever to be in the members’ interests.

Yet only a week earlier, as reported in our blog,  Fraser Sparkes from leading legal firm Hammonds was suggesting that trustees should not become involved with ETV exercises as it goes beyond their trustee responsibilities. As if being a trustee wasn’t complicated enough!!

Mr Norgrove also described a number of “worrying tactics”  including the offer of advice paid for by the employer, on the condition members take that advice, excessive pressure to make a decision and the provision of misinformation. Whilst clearly I would not condone any of these tactics it would be interesting to know just how widespread these abuses are or if a few isolated incidents are colouring the Regulator’s view as a whole.

The provision of independent financial advice on pension transfers is one of the, if not the, most heavily regulated areas of financial advice and it’s hard to believe that such practices are widespread where IFAs are involved in the process. If the abuses alluded to by Mr Norgrove are indeed widespread, then surely it represents a very significant breakdown of the regulatory process and the FSA need to be provided with names of the parties involved to allow them to investigate thoroughly and take appropriate action.

In my experience highly reputable firms of IFA’s with highly qualified advisers who offer to provide transfer advisory services do so based upon the facts and figures presented to them and take a very cautious approach to any positive recommendation to transfer. All parties work within the guidance issued by the Pension Regulator in January 2007. In our view there is no benefit to a company in doing anything other than ensuring that members can be clearly demonstrated to have made an informed decision as regards their pension options in this scenario. To do otherwise is to leave open the possibility of a member claiming that he did not understand the decision he was making, or worse, was actively misled, and a court or tribunal directing that the liability has therefore not been properly discharged, with the Employer held to be still liable for the “transferred” pension benefits.

As noted above Mr Norgrove also states that “In general it is unlikely to be in members’ interest to transfer out of a DB Scheme.” However, that is not to say that it is never in a member’s interest and clearly depends on the level of transfer value offered in exchange for the benefits given up in the final salary scheme. It will also depend on a wide range of softer issues directly linked to a member’s personal circumstances e.g. health, attitude to risk, etc. I think it is very dangerous for trustees, and indeed Mr Norgrove, to make an assumption about what is in a particular member’s interests without having fully investigated an individual’s personal circumstances and objectives. Certainly any IFA adopting such an approach would be leaving himself open, quite rightly, to disciplinary action by the FSA.

Each individual will have a choice to make based upon the figures and their personal circumstances and ideally with the benefit of independent financial advice paid for by the employer. In this area there must be no additional incentive for advisers to encourage transfer, such as by the payment of a commission, but be based upon a fee payable regardless of the recommendation given.

Only if the offer represents true value for money is it likely to be recommended by the adviser and accepted by the member. Anything else just leaves the adviser open to a future claim and to pursuit by their regulatory body.

It is also interesting that by their very nature these exercises will be time pressured as any transfer offered will only be guaranteed for a limited time and as top-ups could swing wildly companies will need limit the extent of their commitment within this timescale. Frequently members are unaware of this and if pointed out could look like undue pressure is being exerted. 

When attractive top-ups are made available along with high quality financial advice, ETV exercises represent a legitimate risk reduction tool for scheme sponsors and ultimately an attractive alternative for individuals who have a right to chose what is right for them rather than having someone take that decision on their behalf.

Finally, Parliament has seen fit to make the FSA responsible for the regulation of the provision of financial advice, including advice on pension transfers. Given this, and noting the legal view mentioned above about the limits of trustee responsibility, I would question whether trustees should have a role in regulating financial advice thrust upon them as suggested by Mr Norgrove. Trustees should take their own legal advice about their responsibilities in this area and the potential consequences of any actions or inactions on their part.

Neil Copeland

Actuaries are only human

Can we get something straight? Final salary pension liabilities are not linked to the yield on AA rated corporate bonds. Nor are they linked to returns on equities. Nor are they linked to the yield on gilts, index linked or otherwise.

Final salary pension liabilities are the aggregate of the payments promised to members and their beneficiaries over the life time of a scheme. For closed schemes this is a finite amount, but the actual amount can’t be known until after the death of the final member and beneficiary. Add up all the payments to members, beneficiaries, advisers, the PPF and other parties, and that’s your liability.

So if you have been rash enough to promise your employees final salary pensions and had your original vague aspiration to ensure those faithful and loyal employees who stuck with you through to their retirement had a reasonable income in retirement,  Read more »

David Davison

I see the Irish Government has launched a range of measures to help employees of companies who become insolvent. Similar objectives to the PPF in the UK but the PIPS scheme seems to have come up with a slightly different solution with the Irish Exchequer taking on responsibility for paying pensions in exchange for a payment from scheme trustees with any savings over the cost of annuities used to reduce pension shortfalls for other members. Should produce some short term revenue for the beleaguered Irish Exchequer but only in exchange from some potentially toxic long term liabilities. Better or worse than the PPF – it’ll be a long time before we know!!

Brian Spence

The snappily titled The Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009 provide (among many other things) for connected employer bulk transfers to be made from a formerly contracted out scheme (such as a closed pension scheme) as opposed to only from a currently contracted-out scheme without consent from 6 April 2009.

Bit of an arcane point but I wonder how many transfers were made in breach of the old rules – I can think of at least one where the lawyers may have got this wrong. I suspect there are may be others.

Would suggest schemes take legal advice to make sure they tie up any loose ends.

David Davison

There has been much written recently about the potential pitfalls of so called ‘inducement exercises.’ Whilst some of the concerns are valid I believe that provided those participating take the time to understand the recent regulatory guidance and the roles of various parties in the process then the risks are lower and more manageable than they might appear at first glance.  Read more »

David Davison

There has been a huge amount of what I can only describe as ‘hype’ in the popular press and financial magazines over recent months, almost wholly negative, about the practice of employers topping up final salary scheme transfer values to allow members to exercise a real choice in relation to their pension benefits.   I wouldn’t wish to suggest that reporting on this matter approaches the worst excesses of the fourth estate (“Freddie Starr ate my Hamster” or “London bus found on Moon” for example) but headlines such as “Bribes offered to quit final salary schemes”1 and “Regulator launches probe into growing ‘cash for company pensions’ scandal”2 certainly leave scope for a more considered and balanced assessment of the issues. Read more »

Brian Spence

David Davison, a Director at Spence & Partners, independent actuaries and consultants, has called for a rational debate as to how companies which wish to better manage their final salary pension liabilities engage with their current and former employees.

Said Davison, “There has been a huge amount of hype over recent months, almost wholly negative, about the practice of employers topping up final salary scheme transfer values to allow members to exercise a real choice in relation to their pension benefits. There is scope for a more considered and balanced assessment of the issues. Read more »

David Davison

There’s been a lot of press comment recently about companies offering staff what have been called ‘sweeteners’ to give up all or part of the final salary promise from their pension scheme.

Given the extent of the final salary pension problem, its potential impact on business and the likely timescale over which scheme deficits now need to be addressed I think that it’s hardly surprising that companies are seeking solutions which help them to manage their final salary liabilities more proactively. Read more »

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