Legal experts have reported an increase in pension schemes planning to reduce their liabilities by changing their rules to allow partial transfer of members' pure defined benefit assets into defined contribution arrangements.
Schemes are pursuing such transfers in order to offer scheme members some flexibility without giving up their entire guaranteed DB income, but these exercises could prove costly and complicated to administer, lawyers have said.
The pension schemes bill introduces from April a statutory right for a type of partial transfer, in which a member with more than one type of benefit in a scheme – for example DB plus additional voluntary contributions – will be able to transfer one of these categories of benefit while leaving the other untouched.
However, the partial transfer rules that some DB schemes are exploring would also allow the member to take part of their pure DB benefits, leaving behind a balance to take as income in retirement.
Emma King, pensions partner at law firm Eversheds, said it had seen several DB clients looking to amend their scheme rules to enable partial transfers in a bid to derisk.
"As far as the scheme is concerned, if a large number of people transfer out some of their DB benefits it will reduce the scheme’s liabilities and remove the associated risks," King said.
Employers might also wish to help give members access to DC while retaining some level of paternalistic oversight towards their members' retirement security.
King said some trustees could be concerned about members taking all their benefits as cash and "blowing it", while a partial transfer could mitigate this.
Matthew Demwell, partner at consultancy Mercer, said while there had been a slight uptick in interest from schemes, activity has been limited, with potential issues including the continued administration costs on the remaining balances. Members looking for some level of guaranteed income in retirement could now secure that in a variety of ways through the annuity market.
Remaining in DB also holds the risk that a weak sponsor leads to a scheme falling into the Pension Protection Fund, which could result in benefits being cut. "If you’ve transferred you money out to, say, a regular insurer, you’ve got Solvency II-type capital reserves behind you," said Demwell.
But he added partial transfers could benefit schemes targeting self-sufficiency, but they should explore how such a move might affect the overall funding level and compare it with the cost of buy-in or buyout.
Demwell said: "If you do that kind of analysis, you may come to the conclusion that it might be worth paying out transfer values higher than you might otherwise be prepared to pay, because the cost is actually lower than a long-term buyout or self-sufficiency cost. Now that really can be a win-win.”
Simon Taylor, partner at consultancy Barnett Waddingham, said partial transfers pose actuarial and administration problems that "should not be underestimated".
"How should the transfer value be calculated and how are the benefits remaining in the scheme calculated?" he said. "Do you transfer out the earliest benefits the member has accrued or a proportion of all the accrued benefits?"
Taylor said many schemes would have to change their rules to enable the provision of partial transfer, but added some might not be aware they already have the ability.
He said: "There will be plenty of schemes where the ability to pay a partial transfer is tucked away in the depths of the rules, but has never been used or promoted because of the administrative complexities."
