Admin warning on DB-DC transfers

Sponsors and trustees of DB schemes are being advised by consultants that their members can take advantage of new legislation giving greater payout flexibility to DC scheme members.

But industry bodies – including the Pensions Regulator – have warned members are not necessarily better off as a result, and the additional administrative and actuarial work could be burdensome for schemes.

Managers should weigh the reduced liabilities against the proportion of members who would benefit from a transfer, the impact on the scheme and the advantage to the individuals concerned.

Since June last year, members of DC plans are no longer obliged to buy an annuity by age 75. And this year’s finance bill widens the options, allowing DC scheme members to access their private pension savings through drawdown products from age 55.

Through what the government calls a flexible drawdown, they can withdraw unlimited amounts from their pension pot, subject to leaving enough to provide a minimum income requirement (MIR) of £20,000 per year for life.

The MIR, which includes payments from the state pension, is meant to ensure retirees do not fall back on means-tested state benefits if they exhaust pension savings taken as a lump sum.

Admin burden

But James Walsh, senior policy adviser for workplace pensions at the National Association of Pension Funds (NAPF), was not sure where the advantages lay for schemes.

He noted the similarities with the long-standing enhanced transfer value transactions, although there the employer takes the initiative whereas with flexible drawdown the individual makes the first move.

“The questions trustees should ask is whether their rules allow members to do this and whether it's something they want to sanction,” he said.

“From the scheme’s point of view, handling a transfer request of this sort would require extra work – an actuarial calculation and some admin costs. The NAPF wouldn’t want to see any additional administrative burdens on schemes.”

Walsh added that the MIR means the additional flexibility will only be available to a limited number of DC scheme members and questioned whether many DB members would also be able to take advantage.

Kevin Wesbroom, UK lead for global risk services at Aon Hewitt, who has been advising schemes to consider the option, conceded the initiative would appeal only to DB schemes with well-paid members.

“That doesn’t have to be just investment banks,” he said. “We are seeing a broad interest among our clients, it might only be for a handful of people but with a big organisation it could be into the hundreds.”

Proponents of allowing DB members to transfer into DC arrangements argue schemes are removing the long-term inflationary and longevity risks from their liabilities.

“The sad fact is that the more you're paid, the longer you live. So by going through this a scheme is reducing its exposure to very highly-paid members and is reducing its longevity exposure,” said Wesbroom.

But the Pensions Regulator was far from enthusiastic. In a statement to schemeXpert.com, it said: “Whenever a member is faced with the option of transferring benefits from a DB scheme to a DC scheme, it is important they understand the consequences of the offer and take advice if necessary."

The regulator’s guidance on transferslists the specific criteria when it feels a transfer may be appropriate:

• When a member’s life expectancy is limited

• Where no dependants will be supported long term by the DB pension

• Where the member is a sophisticated investor and specifically looking to balance the risks in a portfolio of retirement benefits

• Where the level of benefit is significantly better than the Pensions Protection Fund (PPF) cap and as such would be cut if the schemes enter the PPF

Advantages for members

Nevertheless, the Pensions Policy Institute (PPI) warned in a report released in April that annuitising would remain the safest and most appropriate way for the majority of people to access their private DC pension savings.

“A lot of people will have too small a pot for drawdown and within the product provider market there’s an assumption that £100,000 is the absolute minimum needed to be able to bear the risks in drawdown,” said Daniela Silcock, a senior policy researcher at the PPI.

“But there is no regulation saying you can’t sell to people with lower amounts.”

Towers Watson outlined the opportunities for schemes at a seminar in May, in which a third of the trustee and employer attendees said they expected to permit members to transfer at some point, with 57% saying they would consider it. Only 9% said it was not on their agenda.

“We called the seminar the Quiet Revolution,” said Paul Kitson, a senior consultant with Towers Watson who addressed the seminar.

“While the new flexibility applies to the DC environment we think it also impacts on DB schemes.”

He noted HM Revenue & Customs’ March statement that the new rules would not affect members of DB arrangements, but last December the Treasury recognised people may wish to transfer from occupational DB to DC.

“It’s a classic case of unintended consequences, but for the first time that I can remember the outcome has gone the right way,” said Wesbroom.