The Pensions Regulator asked the trustees of 14 defined benefit schemes to review their transfer processes and consider cutting transfer values for members considering cashing in their benefits.
Letters reminding schemes of their responsibilities targeted schemes that had experienced an increase in the number of requests for cash equivalent transfer values. The correspondence was first revealed by a freedom of information request by Sir Steve Webb, director of policy at Royal London.
Earlier this year, the Financial Conduct Authority disclosed that the value of money transferred from DB to defined contribution schemes leapt to £20.8bn in 2017 from £7.9bn in 2016, following an FOI request by the Financial Times.
The regulator seems concerned that in a few cases, schemes are overdoing it on transfer values
Sir Steve Webb, Royal London
The regulator’s letter states: “In light of recent events concerning your scheme sponsors, we would expect you to take advice from your scheme actuary about whether the basis on which the CETVs are calculated remains appropriate.”
The letter continued: “This would allow you to judge whether a reduction of further reduction should be applied to CETVs in light of [an] assessment of covenant strength.”
A spokesperson for the Pensions Regulator said: “Transfers from DB schemes to DC schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.”
“Our primary concern is that DB scheme members requesting a CETV have all the information they need to make an informed decision about what is in their best interests,” the spokesperson continued. “This includes understanding the fees that are charged under any new pension arrangement, as these can make a significant difference to the value of the fund.”
Members need advice, not just guidance
Webb said schemes experiencing high volumes of transfer activity, including those of banks, may have been among those contacted. Those with a weak employer covenant were also likely recipients of TPR’s letter, he said.
“The regulator seems concerned that in a few cases, schemes are overdoing it on transfer values,” he said.
He advised trustees to promote members access to advice, instead of relying upon the use of guidance.
The consequences of failing to provide advice were evident in the British Steel saga, where thousands of steelworkers took poor advice and subsequently transferred out of the scheme.
“One of the big failings of the British Steel case was that the trustees – yes, they set up a guidance line, but the guidance line wasn’t what people needed. They needed advice,” Webb said.
Schemes should actively monitor transfers
When a scheme is underfunded, trustees have the option to reduce transfer values by asking an actuary to examine the funding position and issue an insufficiency report.
However, most trustees look at transfer value activity on a retrospective quarterly or bi-annual basis, according to Daniel Taylor, director at third-party administrator Trafalgar House, meaning action may come too late.
“If schemes get a high volume of transfers, then they may not be in a position to quickly implement an insufficiency report and reduce transfer values,” he said, encouraging schemes to monitor transfer data frequently.
Ben Roe, senior partner at Aon, said that large cash outflows have to be given serious consideration by schemes, regardless of the circumstances, but argued that many boards are aware of the potential issues.
“Trustee boards do look at this issue very seriously before making any decisions, and they have been quick to seek and take advice on what is right for their scheme’s particular circumstances,” he said.
Avoid a knee-jerk reaction
The regulator is working with the FCA and the Pensions Advisory Service to support trustees and members through transfer processes. The bodies have developed a generic letter to be sent to members considering a transfer.
The letter reads: “In most cases, transferring out of a DB pension scheme into a different type of pension arrangement is unlikely to be in your best interests.”
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The regulator’s letter to trustees received support from Margaret Snowdon, chair of the Pensions Administration Standards Association.
“The large transfer values generally on offer currently tend to entice people to transfer whether or not [it is] in their best interest, and make it tough for administrators to try to inject reason into the process through their due diligence,” she said.
“While we welcome steps to ensure transfer values reflect reality, care needs to be taken to avoid any ‘knee-jerk’ reduction in CETVs that would put fairness at risk and possibly even create a rush to transfer before the gate closes,” she added.
