Advertising transfer values: trustee duty or danger to members?

The fund reported a “significant increase in transfers out of the plan”, with £57.6m paid out, which along with £71.4m pension payments and a low overall investment return led to a fall in net assets over the year of £57m to £2.6bn.

However, the estimated value of the scheme’s liabilities also dropped by £90m to £2.4bn on a technical provisions basis. The combination of these movements resulted in an improved funding level, up to 107 per cent on a technical provisions basis as at March 2018, from 105 per cent the year before.

Rexam is not unusual in experiencing this phenomenon. The volume of DB transfers has soared since the introduction of pension freedoms in 2015. A combination of high transfer values and the lure of greater flexibility has led many savers to make the switch to a defined contribution plan.

Earlier this year, the Financial Conduct Authority revealed that the value of money transferred from DB to DC schemes leapt to £20.8bn in 2017, from £7.9bn in 2016.

In June 2017, Mercer figures prepared for the FT estimated that savers cashing in their final salary pots helped shave up to £50bn off UK pension liabilities in two years.

But the complexity of DB transfers, not to mention the risks involved, have proved problematic. Targeting of transfers by scammers and unscrupulous advisers has left trustees with the difficult decision of whether to make members aware of their rights to transfer, and how to engage with them.

Do transfers put remaining members in jeopardy?

One concern for trustees is that they might pay out more transfers than they can can afford, putting the remaining members’ benefits at risk.

In August, the Pensions Regulator asked trustees of 14 DB schemes to review their transfer processes and consider cutting transfer values.

A letter from the regulator stated: “In light of recent events concerning your scheme sponsors, we would expect you to take advice from your scheme actuary about whether the basis on which the [cash equivalent transfer values] are calculated remains appropriate.”

Marian Elliott, managing director of integrated actuarial at Redington, notes that this scenario would be unlikely. “Provided the pension scheme has enough assets to cover transfer values for all members, a large volume of transfers should not negatively affect remaining members,” she says.

Even where the scheme does not have sufficient assets to theoretically pay transfers for all members, if there is a strong likelihood that the employer will return the scheme to full funding over a reasonably short period, many trustees will still pay full transfer values, says Elliott.

That is not to say that paying transfers is a risk-free strategy for trustees, and Elliott points to liquidity as a key concern.

“There may also be a mismatch between the scheme’s investment strategy and the shape of the liability payments, which can change significantly if a large number of members crystallise their benefits early by transferring them out of the pension scheme. This can affect hedging and other derisking strategies,” she notes.

Schemes should steer clear of advice 

Perhaps more likely, and just as worrying, is the risk of members either making the wrong decision to transfer out, or falling victim to a pensions scam.

Many experts agree that for most people, giving up the security of a guaranteed DB fund is not the right decision.

“The thing that trustees really need to be careful about is always, obviously, avoiding giving financial advice,” to make sure they are not exposing themselves to risk of complaint, says Matthew Swynnerton, partner at law firm DLA Piper.

Members are legally required to seek regulated financial advice before a transfer request is approved.

However, last year, the FCA found that fewer than half of DB transfer advice processes were suitable.

To mitigate this, some employers and schemes will go as far as sourcing an independent financial adviser and offering to pay for members to consider their options with an adviser. Global materials technology company Luxfer Group recently did exactly this.

Member safety paramount

Making sure members make an informed decision is important, but protecting savers from scammers is also crucial.

In July, the Pensions Ombudsman upheld a police officer’s complaint that Northumbria Police transferred his pension to a new scheme without having conducted adequate checks or provided him with sufficient warning about scams.

The case highlighted the trustee duty of care, hammering home the need for schemes to carry out due diligence.

“Trustees can and should do a measure of due diligence before processing a transfer and can check ‘watch lists’ and other sources to help protect members against scams,” says Steve Webb, director of policy at Royal London. Trustees who help members to access high-quality impartial financial advice will also be contributing to protecting members from the risk of scams.

The risks involved when it comes to transfers can mean many DB trustees are in a dilemma over how they should approach transfers, such as whether to include transfer options in pre-retirement communications.

A recent Royal London and Eversheds Sutherland paper highlights that sticking to the legal minimum requirements could still leave trustees open to legal challenge, while advertising transfers without proper support could lead to members making the wrong choice.

Trustees of the Rexam scheme opted to make members aware that the plan allows transfers, but highlighted that they are required to take regulated advice from a registered IFA before doing so – directing members to the Unbiased website.

Consultancy LCP’s 2017 DB member communication survey found that 45 per cent of plans were now including the option to transfer in retirement documentation.

“The more transfer options you give... might increase the likelihood of a complaint being made,” says Swynnerton.

He stresses that trustees must do everything they can to protect members, including following the Pension Scams Industry Group’s code of good practice on combating pension scams.

Proactive or passive?

If trustees do proactively engage with members, there are several ways in which they can do so. They can make members aware of the availability of a transfer value without providing a figure, provide transfer value figures in retirement packs, or pay some or all of the cost of financial advice for those considering a transfer.

Webb notes that “trustees simply do not have anything like the detailed knowledge of their membership that would enable them to make assumptions about whether a transfer would be a good idea”.

The former pensions minister adds that while most members would be well advised to stay put, there may be many members whose individual circumstances mean that thinking about a transfer would be well worthwhile, for example if this is only one of their DB pensions. “Trustees should not make general assumptions about the membership as a whole.”