Are ETVs always inappropriate? Ask a BA pilot

What Steve Webb should push for, if he’s intent on changing legislation to protect beleaguered DB members, is a legal requirement for members to have had independent advice before deciding how to proceed.

Look at the case of the British Airways (BA) pilots with large pensions who sought transfers out of their final salary scheme over fears of it falling into the Pension Protection Fund (PPF).

These pilots had large retirement pots that could be greatly reduced under maximum PPF payout rules and, correctly, sought advice on moving their savings into a different arrangement – in the case of the story Pensions Week ran, a self-invested personal pension (Sipp).

David Downie, a director at Rowanmoor Pensions, told Pensions Week: “The members view the risk of the scheme entering the PPF, and thereby reducing their accrued benefits substantially, as being far too great.

“In the most extreme cases I know of, pilots in the BA scheme who are also forgoing future benefit accrual in the BA scheme until their normal retirement ages.”

BA’s pension scheme troubles were well publicised: the two final salary schemes reported a £1.74bn actuarial deficit at March 2008. The airline was also hit by the Icelandic volcanic ash crisis, which BA estimates cost it £15m-£20m per day.

It’s not clear whether those pilots did indeed choose to move their benefits to a Sipp. But the case shows that in some instances, a cash equivalent transfer value (CETV) and enhanced transfer value (ETV) exercise can be the right choice.

Back in December 2010, the Department for Work and Pensions announced a welcome u-turn on a total ban on transfers between contracted-out arrangements from DB to DC schemes, following an industry consultation.

Webb said at the time: “The abolition of contracting-out on a DC basis will provide an important simplification for schemes and members. However, we will introduce safeguards to ensure members are aware of the implications of transferring.”

And now we know what those safeguards might be: no more CETVs.

Looking back over the past few years, ETVs and CETVs haven’t had the best press.

In 2008, as many companies rushed to buyout their defined benefit pension schemes, some providers were accused of using CETV’s as a way of getting members out of the scheme before the buyout took place – making it cheaper for the employer to arrange.

Even when the cash-bung wasn’t offered by employers, regular ETVs weren’t particularly popular. One article from Pensions Week in 2008 showed many employers feared a mis-selling scandal appearing off the back of an ETV exercise.

Rashpal Bhabra, then head of Watson Wyatt’s corporate consulting group, told PW:  “A lot of small companies have gone down this route, but the concern for larger companies is two-fold. The first is that going through an exercise that may involve mis-selling.

“The second bit concerns publicity. If Panorama does a big documentary on this, it may lead to a big firm being named and shamed.”

With the equity markets continuing to be volatile, buyouts are increasingly difficult to negotiate, so many employers are trying to shift liabilities off their books by encouraging their staff to move from their DB scheme to a DC offering.

Of course it is inappropriate to try to offload members by giving them a poor transfer value, and it’s worse if that’s coupled with a cash bribe, say, close to Christmas when household’s finances are tight and some extra money looks more appealing.

But Webb is in danger of tarring all ETV and CETV exercises with the same brush here.

In January this year, the Pensions Regulator privately admitted its original guidance around enhanced transfer values (ETVs) went too far in putting “onerous responsibilities” on trustees.

In response to concerns raised about the ability of trustees to comply with December 2010’s ETV guidance, senior industry sources told Pensions Week the regulator had acknowledged the difficulties, but was bound by its previous pronouncements.

These sources added the regulator had said it would show restraint on the more demanding issues of the guidance, particularly the requirement to monitor advisers appointed to the transfer.

The regulator itself denied it had softened its approach, saying it expected trustees to “play an active role in ensuring members are able to make informed decisions”.

And the final wording of the guidance still advised trustees to “start from the presumption” ETVs are “not in most members’ interests”.

Trustees should have a “clear understanding of their duties and legal obligations”, it says, ensuring legislative compliance and maintaining their fiduciary duty - and, if necessary, should “seek their own legal advice”.

It’s this last point which should be championed by Webb. Trustees and members should seek advice before making any decisions to do with their benefits. In some cases, an ETV, even a CETV, could be beneficial.