A communications exercise warning members of the Strathclyde Pension Fund about the risks of cashing in their benefits has seen the scheme’s membership continue to grow despite declining payroll numbers.
Transfer requests have skyrocketed in 2017, as members become increasingly aware of the high cash equivalent transfer values available to them in a low interest rate environment.
However, the Strathclyde Pension Fund sought to counter the temptations to leave the scheme, which include “salaries reducing in real terms, freedom and choice legislation, pensions scams, and removal of the national insurance rebate in April 2016”.
The scheme’s active, deferred and pensioner membership have all been growing since 2012, after a sharp fall following the financial crisis.
We want to make them think twice about leaving a very, very good scheme
Richard McIndoe, Strathclyde Pension Fund
Richard McIndoe, director of the Strathclyde Pension Fund Office, said these sustained increases could be at least partly attributed to the scheme’s communication efforts, “given that we’re going against the trend of employment”.
The number of employers participating in the scheme, and local government payroll numbers, have both been steadily decreasing in recent years.
Auto-enrolment could also be credited for the growing numbers of active members, said McIndoe.
He said the exercise was not intended to obstruct members with a legitimate reason to cease accrual or to transfer. “Clearly members who are auto-enrolled have the option to leave,” he said.
However, the aim of the initiative is to “make them think twice” about leaving “a very, very good scheme”.
Spin or valid option?
Independent pensions expert John Ralfe commended the trustee board’s effort to make members aware of the risks of leaving the scheme.
“It shouldn’t be a legal responsibility, but trustees should try to be as helpful as possible to members in all sorts of ways,” he said.
He warned that savers were being lured into making poor post-retirement decisions by the promise of “magic equity beans” creating stable returns in drawdown, to the financial advantage of the industry.
“Do not underestimate the lobbying capacity of individual firms and the industry as a whole to try and persuade people to cash in,” he said.
For members considering their post-retirement options, the temptation to cash in a pension is as great as ever.
Consultancy Xafinity’s latest transfer value index projected a £241,000 lump sum for a member who is entitled to £10,000 a year from age 65, with reports of cash equivalent transfer values being offered at 35 to 40 times pension.
Meanwhile a report prepared for the Financial Times by Mercer calculated that UK schemes shed around £50bn in liabilities over the past two years.
The level of transfer values being offered today means that leaving the scheme is no longer the preserve of members in ill health, according to Jonathan Watts-Lay, director of advisory firm Wealth at Work.
But he cautioned: “Whilst it may be right for some people… for a lot of people it may not be.”
He applauded the use of guidance and education programmes to make members aware of their options and the risks involved with each choice they make, especially when employees are at an age where regulated advice may not be particularly meaningful.
Government intervention needed
The greatest problem with the current transfer environment is not the suitability of the transfer itself, but the frictional costs and dangers associated with the transfer process, said David Fairs, a lead partner in KPMG’s people practice.
Transferring can prove costly, and with no trustee oversight of members who take advantage of pension freedoms, savers are an easy target for scammers, he argued.
“If defined benefit schemes were allowed to make freedom and choice available directly from the scheme then trustees would have a duty to make sure that the terms that were being offered are fair,” he said. “An education programme can only go so far.”
