Posts Tagged ‘Pension Transfers’

Hugh Nolan

(Almost) every stakeholder in the pensions industry wants the same thing – better member outcomes. Sponsors. Trustees. Regulators. Government. And, of course, members.

Why the odd and perhaps grammatically shady parenthesis at the start of the sentence? Well, unfortunately, operating on the fringes, or even lurking in the shadows, are parties less interested in the member outcome and more interested in personal gain. Sponsors do occasionally misappropriate members’ pension funds. Not all financial advice is given exclusively in the interests of the member. Scammers will leave retirement plans in tatters and jet off to sunnier climes without a second thought.

Governance is used widely across the industry to reaffirm how seriously we take our duties in support of better member outcomes. Quite rightly, we need to be rigorous in how we govern schemes in relation to matters of investment, risk, administration and member communications.

However, when it comes to protecting members’ interests when they transfer out of schemes, the industry is sometimes caught between a rock and a hard place. The rock being the individual’s statutory right to take their pension in a different shape or form, through a more flexible arrangement; the hard place being the industry’s desire to protect the member from making decisions that could have a detrimental effect on their financial future.

Perfect storm

To paraphrase a well-worn cliché, every cloud has the potential for rain. The significant fall in gilt yields over the last year has proved good news for defined benefit transfers with the average amount having risen substantially. However, the allure of pension freedoms, coupled with increased transfer values, may have brought on something of a perfect storm.

Members need to be aware that the decision to sail away from the safe harbour of defined benefit to the unchartered waters of pension freedoms will not always lead to an island paradise. They will need to first avoid the pirates and sharks.

The FCA has previously stated that defined benefit transfers are not generally in the interests of individuals and that advisers must provide compelling factors that mitigate the transfer. Nevertheless, between April 2015 and September 2018, seven out of ten transfers from defined benefit schemes were apparently approved by independent financial advisers.

The government has ruled that every individual with a transfer value of more than £30,000 must take independent financial advice before transferring from a defined benefit scheme. Without sufficient education and support to make the right decision for their own specific circumstances, members may not make the most appropriate decision for their future. The Work and Pensions Committee has said that the rise in defined benefit transfers is a ‘major mis-selling scandal’ and sees contingent charging – where advisers only receive payment when transfers go ahead – as a ‘key driver’ of poor advice.

Industry collaboration

Step forward the Pensions Administration Standards Association (PASA). It has launched new transfer guidance to help support members of defined benefit schemes to make better choices. PASA’s transfer guidance aims to improve the administrative efficiency of transfers, assist the overall member experience (both in terms of speed, and crucially, safety) and provide better communications and transparency. PASA’s DB Transfer Guidance is intended to make it easier for providers, advisers and members to see all the information they need to make better informed choices.

While many within and without the industry firmly believe that members are likely to be better off staying in their defined benefit scheme, the appeal of pension freedoms will often be too strong to resist.

Those members that choose to transfer need all the support the industry can provide. This new guidance is a good example of the industry working collaboratively, along with government and The Pensions Regulator, to help provide more support to members and deliver the better outcome (most) stakeholders are looking for.

Angela Burns

You would have to have been living on the moon over the past few months not to have seen the huge amount of press about pension transfers. Reading it you would be lead to believe that all individuals are gullible idiots and that all financial advisers are scurrilous rogues. Whilst undoubtedly there may be some who fit in to these categories it is far from all. So what is actually driving individuals to consider transferring their defined benefit pot to something with a much less certain outcome?

There is no doubt from my experience that individuals have a more unhealthy pessimism about their life expectancy than statistics would justify and a greater sense of expectation about how they can manage money than experience would suggest.

A starting premise for financial advisers when providing transfer advice is to begin with the assumption that it is not in the individuals best interests to transfer out of a defined benefit arrangement. However with more than 100,000 people having transferred out of DB schemes over the last year (according to Royal London), £10.6bn transferred in the first quarter of 2018 and no sign of a slow down – why has transfer activity increased so significantly in recent years?

Pension Freedoms

Undoubtedly the pension freedoms and choice introduced in April 2015 are the single greatest reason for the increase in transfer activity.  On transferring liabilities to a defined contribution scheme, individuals can access a range of flexibilities including:

  • Purchasing an income (always available but no longer a requirement)
  • Taking their fund as cash subject to tax charges
  • Entering into a drawdown arrangement whereby an income can be taken each year and the fund remains invested

There are also changes to death benefits whereby residual funds pass to dependants tax free on death before age 75 (previously taxed at 55%).

With this in mind, many individuals have looked to access these flexibilities.  Individuals may also feel that they get better value from transferring if:

  • They are single and would not benefit from a spouse pension on death from a defined benefit arrangement. Transferring to a defined contribution scheme means they can access the full value of their accrued benefits with nothing lost on death;
  • They are in ill health and have a lower life expectancy where greater value can be derived over a shorter term.

If an individual already has sufficient pension savings elsewhere or their spouse has material savings, then transferring part of a defined benefit to a defined contribution arrangement could provide a fund that can be taken more flexibly facilitating early retirement, a new career or even a release of early value to children or grand children.

Releasing funds to deal with debt may be more attractive than securing long term income and for those in financial hardship and accessing pension savings via a defined contribution arrangement may be their only option.

Shape of benefits

The provision of a set income increasing by a fixed rate with a spouse benefit may not provide an individual with the shape of benefits they may need or want. The ability to take more income early to facilitate early retirement for example,  and lead a lifestyle in the earlier years of retirement may be a strong driver.

Value for money

With interest rates still at very low levels and inflation relatively high, transfer values are much higher than they might have been historically and as a result, are being seen as good value.  Multiples of 30-40 times the individual’s pension are not unheard of.

Discharging pension scheme liabilities via transfer values is a lower cost option for employers and as such incentivised employer sponsored transfer exercises are still prevalent in the industry.  Individuals may view a transfer value already set at an attractive level but with a further enhancement, as too attractive to turn down.

Overall the perception that transfer values are now providing good value for money is resulting in more individuals now considering this as an option.


Finally, individuals in a defined benefit scheme with a high risk sponsor may feel that remaining in the scheme presents a risk.

Some individuals may also feel that they can manage their money better and invest their defined contribution fund in such a way that they get more at retirement.

Ultimately the decision is a highly complex one hence the requirement for anyone with a transfer value about £30,000 to receive independent financial advice is a sensible one. There are a huge amount of issues that should be considered and individuals should do what is right for them based on their own circumstances. Without this expert guidance people may make decisions which are unsuitable based upon inappropriate, misleading or indeed no information which may ultimately lead to bad outcomes.

Richard Smith

We are only days away from 6 April 2015 when the new pensions freedoms take effect. Communication of the upcoming changes is being ramped up in the popular press, and this will undoubtedly lead to increased interest from members in gaining access to their pensions savings.

The game changer is the complete flexibility for over 55s to take their pension benefits from a DC scheme in whatever manner they wish. Many defined benefit (DB) scheme members will be demanding similar flexibilities from their own pension arrangements. Legislation does not yet allow DB schemes to offer this, so we would expect there to be strong demand from DB members to transfer their benefits into a defined contribution (DC) scheme at retirement in order to access these.

The new norm will be for members to request transfer value quotations at least annually from age 55. A large number of retirees will elect for the security of the traditional DB pension, but a significant proportion – perhaps the majority – will transfer out in order to take control of their savings.

What should trustees and employers be doing as a result? If this is managed properly, there is a real opportunity for a win-win-win for members who receive their benefits in a manner that is more valuable to them, for employers who benefit from a smaller more manageable scheme and a reduction in exposure to cost increases as liabilities transfer out, and trustees who are able to deliver tangible value to their members and reduce risk levels in the scheme.

One thing is for certain: doing nothing is not an option. Read more »

Richard Smith

(Spence & Partners latest blog for Pension Funds Online )

Last week I had the pleasure of chairing a session at the annual conference of the Association of Consulting Actuaries. I had high hopes for an interesting and interactive session, and was not disappointed. The slot was entitled “Current issues in corporate pensions” and you don’t need to work in the industry to know that we are currently experiencing some pretty momentous issues in the corporate pensions space.

The speakers had rather optimistically chosen six topics to cover in their hour-long slot. I say rather optimistically, as we only had time to cover about half of them. Listening to the presentation and the subsequent debate, I was struck by the sheer scale of the challenges that lie ahead for the unwary employer over the coming months. Read more »

Mike Spink

DC scheme sponsors and trustees can now proceed in earnest to review their schemes and ensure that they are fit for purpose from April 2015.

A number of organisations will have been waiting upon this week’s announcement before moving forward. This revolved around the action that the Treasury would take to mitigate reduced tax receipts as older workers used the new freedoms to potentially draw their salary more tax efficiently from next year. There was a very small risk that the new pension freedoms might have been curtailed given the scale of the Treasury’s potential tax losses, but George Osborne has confirmed that this issue will be addressed by placing new restrictions on the level of future contributions eligible for tax relief once maximum tax free cash has been taken.

DC sponsors and trustees will be pleased to hear that the Guidance Guarantee will be provided by independent organisations (The Pensions Advisory Service and the Money Advice Service are mentioned as ‘lead’ organisations) with the costs being funded by a levy paid by the Regulated adviser community. The Financial Conduct Authority has issued a Consultation around the elements of the Guarantee for which it will be responsible. As such, we await further details before a clear picture of the mechanics of the Guarantee becomes clear. Read more »

Susan McFarlane

Spence & Partners, the UK pensions actuaries and administration specialists, have said that today’s announcement on the continued permission for DB to DC transfers should be a catalyst for trustees and scheme sponsors to work more closely together.

Marian Elliott, Head of Trustee Advisory Services at Spence, commented: “Immediate actions for trustees will be in communicating the outcome of these announcements to members and liaising closely with the administrators on the processes that will be needed to comply with the guidance guarantee. Trustees should also be prepared to collaborate with employers on any de-risking exercises that take place and consideration should be given to whether scheme design is affected by the announcements.

“Trustees should also monitor what impact the announcements may make to the scheme’s risk profile, should a significant number of members opt to transfer out. Trustees should not react by overhauling their strategy, however more consideration should be given to liquidity issues and funding monitoring, so that trustees can react quicker to the need for strategic adjustments. Other considerations for schemes will be around whether assets are sufficient to meet the needs of the potential increase in transfer requests on the back of this announcement, as this may involve an agreed funding top up with the sponsor.”

Alan Collins, Head of Corporate Advisory Services, added: “The announcements today should be welcomed and treated by employers as a trigger for positively managing their scheme liabilities. With the prospect of DB members looking to move to the far more flexible defined contribution market, employers should review their on-going plans for the scheme and target available resources to fund transfer exercises. Defined benefit schemes continue to present a significant risk to employers, but with this announcement building on recent easements in The Pension Regulator’s approach to funding, employers can start to manage that risk more effectively.

“More individuals have been contacting administrators to request transfer quotations since the proposals were first announced in the budget, so it is important that everything is managed correctly by the employer and scheme from the outset. I welcome the requirement for mandatory indpendent advice on DB to DC transfers. The time is right for employers to work with their trustees to make sure that this advice is on tap for all members making decisions in relation to their scheme benefits.”

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.

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