Industry experts have predicted the use of enhanced transfer value exercises could increase as employers look to encourage switches out of defined benefit plans in light of the Budget changes, but trustees have been urged to ensure members receive adequate advice.
The government this week said it would allow members of funded DB plans to transfer to defined contribution schemes, to take advantage of at-retirement options announced in this year’s Budget.
It’s about empowering people and educating people to make good decisions with the right advice
Jon Hatchett, Hymans Robertson
These transfers are subject to two safeguards if the DB pot is worth more than £30,000. Members will be required to take advice from a financial adviser and trustees will be allowed to take into account the scheme’s funding when considering the transfer.
Also this week the Financial Conduct Authority released a thematic review into the advice people are given when offered ETVs. It reported that people were losing out on retirement income due to poor advice.
The FCA reviewed nearly 300 cases involving bulk pension transfer advice given between 2008 and 2012, and found that in a third of cases the advice was not suitable.
Jon Hatchett, partner and head of corporate at consultancy Hymans Robertson, said the review gave “a call to action to ensure that the proper due diligence is done on processes in the future”, to ensure educated decisions are made by scheme members.
Hatchett said members need to be made aware and understand the options available to them, and the benefits and risks of transferring, and he emphasised the need for all offers to be “communicated really clearly”.
He added: “It’s about empowering people and educating people to make good decisions with the right advice."
But other industry figures have said that for the majority of people it is likely that a transfer, with or without an enhancement, may not be their best option.
Jamie Jenkins, head of workplace strategy at provider Standard Life, said: “People who ultimately seek to secure a lifetime income will often be well advised to do this through the DB promise, rather than entering into an annuity from the DC [defined contribution] arrangement they transfer to.”
Jenkins added that where ETVs are offered to “increase the attractiveness of the deal for the employee… the need for advice is exactly the same, and the benefits and risks must be assessed against the enhanced value”.
Employers might encourage a transfer to a DC scheme to decrease their liabilities, as this then falls to the individual.
Alan Pentland, pensions partner at consultancy KPMG, predicted it will be members nearing retirement who look to transfer their schemes to make use of the “flexibility, control and also take advantage of new retirement products” that DC schemes can offer.
“We expect that some companies will want to support members in working out whether a transfer value is the right option for them by providing and paying for independent financial advice,” he said.
Trustees will need to confirm this advice is being sought. Pentland added: “If an employer is running an ETV exercise and paying for the advice, it would be usual for the trustees to be part of the process to choose an IFA to support members.”
A code of practice for incentive exercises was established in 2012, to monitor their use and improve the protection of pension scheme members.
Margaret Snowdon, chair of the incentive exercises monitoring board and director at JLT Employee Benefits, said transfers to a DC scheme will become a “normal choice” for members approaching retirement, to take advantage of DC flexibility.
She added: “Good practice on ETVs and Pies [pension increase exchanges] is already set out in the incentive exercises code, and the new flexibility proposed for DB-to-DC borrows some of the member protections from the code.”
