Transfers from defined benefit pension schemes have proved attractive in recent years, but there are serious questions over their suitability for many. Trustees cannot afford to shy away from helping their members, and the Pension Protection Fund wants to help, says Sara Protheroe.
Following the introduction of pension freedoms, between 2016 and 2017 more than 140,000 transfers were made from DB schemes, equating to sums of £20.8bn, according to the Financial Conduct Authority and the Pensions Regulator.
These headline-grabbing figures mean scrutiny has been levelled on the quality of advice offered on pension transfers by some financial advisers. In response to cases like the British Steel Pension Scheme, the FCA and TPR have taken steps aimed at improving the advice people receive when considering transfers.
The PPF is there to protect members of eligible schemes and provide them with substantial, reliable compensation for the pensions they have lost. Our protection should be made clear to members
These regulatory changes are welcome, alongside collaborative work with trustees to help ensure scheme members make the right decision when considering transferring out. In January, the independent review conducted by Caroline Rookes into BSPS even suggested that trustees should “compile a list of recommended advisers for pension transfers”.
When it comes to transfers, trustees need a clear communications strategy that reassures members, arms them with the knowledge they need to make an informed decision, and highlights the true value of their DB schemes and the PPF protection that lies behind it. We want to help with that, particularly where employers of schemes are potentially facing insolvency.
Keeping members informed
The message to DB scheme members generally should be that most employers will continue to be able to support their schemes, and can afford to meet the promises they’ve made. Those promises are of significant value, and are legally protected.
Transferring out of a DB scheme is an irreversible decision, and can have profound effects on a member’s financial security in retirement. You are giving up a regular income for life and an income for your spouse if you die before they do.
While transferring out may be right for some, the PPF supports the FCA’s view that most people with DB pensions will be best-advised to keep them.
Understanding the value of the PPF
For some members, finding out that the sponsoring employer of their scheme may be facing insolvency is a concerning time. But there are many ways to support those who may be tempted to transfer.
In some cases, a scheme may have sufficient assets to buy out benefits with an insurer and pay its members more than what the PPF is able to pay by law.
However, where this is not the case, the PPF is there to protect members of eligible schemes and provide them with substantial, reliable compensation for the pensions they have lost. Our protection should be made clear to members.
The PPF will pay members over the retirement age of their scheme, those retired on grounds of ill health, and those in receipt of spousal benefits 100 per cent of what they were receiving at the time of insolvency.
Members under the scheme’s retirement age will receive 90 per cent subject to a cap set by the Department for Work and Pensions. The vast majority of members are not affected by the cap and, in many cases, the PPF will provide members with a better financial outcome than if they transferred out of an underfunded scheme.
At the PPF, we want to ensure that trustees are fully aware of and can articulate the value of DB schemes and PPF protection. We will continue to work collaboratively with the FCA, TPR and trustees to protect not only those already in the PPF, but all potential future members.
Sara Protheroe is chief customer officer at the Pension Protection Fund
