Trustees take more active approach towards transfers

Earlier this year, an Aon survey of more than 300 UK DB schemes showed that 90 per cent of them saw a rise in transfer value requests from members during the preceding 18 months, with around 40 per cent seeing a significant increase.

Trustee approach is changing

The increase in transfer requests, combined with rising concerns about fraudsters taking advantage of members, has led to raised awareness of trustee responsibilities – with many now taking a more hands-on approach.

There’s just a feeling that they have a responsibility to provide members with information about all the options that they have

Ben Roe, Aon

Ben Roe, senior partner and head of member options at Aon, said in a recent Pensions Expert podcast that he has seen “a move towards trustees thinking more about how these options are really communicated to members, and the support that people have to make an informed decision”.

While trustees have perhaps taken a more reactive role around DB transfers in the past, many more trustee boards are now playing a more active role in this area.

“There’s just a feeling that they have a responsibility to provide members with information about all the options that they have [and] ensure that that information’s presented in a fair, balanced and easily understandable way,” Roe said.

Transfers do have benefits for employers. When people move their benefits away from a DB arrangement, the assets and liabilities are discharged from the scheme – making it smaller and less risky.

Moreover, a transfer often leads to improvements in the funding position. Transfer value terms are set on a best estimate basis “that’s more often than not lower than both the funding reserve, and in some cases the accounting reserve too”, said Roe. 

Finally, Roe noted that as schemes mature, the impact of individual transfers on a buyout basis can be really significant, helping to reduce the buyout cost.

Be aware of transfer-related risks

But there are also a number of risks and challenges associated with transfers. High volumes of transfers, for example, can worsen the accounting position, Roe added.

Gary Evans,board director at the Pensions and Administration Standards Association and chair of Pasa’s Transfers Working Group, agreed. 

He noted that some schemes have seen transfer value amounts increase by 50 per cent or more over the past few years. “Alongside that, we’ve seen more and more people of retirement age taking transfers as an alternative to taking a pension from the scheme,” he said.

He mentioned one scheme that, in the past 12 months, has revisited its transfer basis on the back of a valuation and reduced the basis for people of pensionable age by up to 25 per cent.

But fraud is also a major concern. Evans said: “The big issue for trustees with pension scams is that they give rise to unauthorised payments.”

If the transfer is subsequently decided by HMRC to have been a scam, then both the member and the trustees can be subject to unauthorised payment charges, he noted.

Another issue relates to processing transfers, which “is not a very slick process at the moment”, Evans said. 

While there is a lot of work going on in the industry to try to improve that, there is a certain amount of reputational risk for trustees, because transfers may not be quoted properly or settled quickly, he said.

Visit pensions-expert.com to listen to the podcast