Members of defined benefit pension schemes should have the legal right to partially transfer their pension rights, a new report has said. It also recommended enhanced disclosure and broader consideration of client profiles.
Partial transfers have been hailed by some as a win-win option, where certain groups of members can benefit by gaining access to their pension pots while at the same time reducing the liabilities of their pension scheme.
There are certain trustees who I think will not be particularly favourable towards partial transfers
Jon Greer, Old Mutual Wealth
Entitled 'Helping DB members make better retirement decisions', the joint report by provider Royal London and consultancy LCP seeks to bolster awareness of the flexibility available to DB members within their current schemes and shift focus from a perceived negative bias towards pensions transfers.
About three in five advisers said they ‘strongly supported’ the right to partial transfers of DB pensions, according to the study. Only one in six schemes currently provide a partial transfer option.
Royal London director of policy Steve Webb said that the prospect of a complete transfer is daunting for long-serving members.
For those who have worked for a single employer throughout their career “a transfer-out is a huge sum of money, it’s a kind of all or nothing gamble”, he added.
“If you could take part of it out, you could secure your income in retirement… and if you want to invest the rest, that might do well, that might do not so well, but you’ve got your secure income [and] it can derisk the whole process.”
The paper highlights the cost of providing quotes for partial transfers and the effect that blanket legal coverage may have on smaller schemes.
Webb noted that it might necessary to set a minimum scheme size for partial transfers and impose an annual limit on transfer frequency. “It’s not a cash machine model for company pensions,” he said.
Administration is complex
Janet Brown, partner at law firm Sackers, said that features common to current providers of partial transfer access include higher maturity and sufficient reserves for the conversion of a DB pension into its transfer value.
“It does depend on how big the overall transfer value is in as to whether there is the sort of mileage in making that offer available,” owing to administrative issues, Brown said.
The hurdles associated with delivering partial transfers will be scheme-specific, according to Jon Greer, pensions technical manager at Old Mutual Wealth.
But he also pointed to the administration. “The difficulty will be the administrative complexity. Schemes will have to put more resources into it to make partial transfers a reality,” he said.
Greer added that some trustees were less inclined towards allowing partial transfers. “There are certain schemes, there are certain trustees, who I think will not be particularly favourable towards partial transfers,” he said.
Engagement needed both ways
In order to help DB members make good retirement decisions, the paper advocates a range of improvements to scheme communications.
It calls for the inclusion of transfer values in annual benefit statements, a ‘warm-up communication’ at age 55, and standardised information alongside transfer quotes.
But Brown noted that significant responsibility for the engagement deficit remains with scheme members.
“Schemes can put out as much information as they like, it comes back to the members,” she said.
“Trustees often spend a lot of time agonising over what they should put in their member communications, and the feedback they get from the members can often be very limited.”
She said disclosure obligations are not enough: "It’s about people actually thinking about needing to manage DB pension arrangements in terms of what they’re going to do when they retire, whether they need to transfer out in order to have more flexibility.”
Broaden your horizons
The report also calls on advisers to take a holistic view of a client's financial situation, instead of giving a disproportionate weight to “crude measures" of critical yield when advising on DB to defined contribution transfers.
Calls for action on complexity at heart of DB transfer delays
Increased demand for defined benefit pension transfers, lack of transfer experience among independent financial advisers and complexity of DB pensions is adding to transfer delays by putting strain on administrator resources, research has shown.
Currently, if the yield on an investment required to secure an annuity better than the DB pension foregone is “relatively high”, the report states that “the adviser will generally feel under pressure to recommend against the transfer”.
Greer said: “They may not be able to take on that level of risk of moving from a DB to a DC scheme. You have to look holistically at their other assets, their other income, their survivors, their ability to take on that risk, it’s wider than purely a mathematical calculation.”
