DB to DC transfers - just how proactive should pension trustees be?

Topic:

Hot topic

Date published:

Wednesday, 4 July 2018

Author:

Kevin Clark

Should we be advertising to pension members the ability to transfer benefits from a defined benefit (DB) to a defined contribution (DC) scheme and helping facilitate the process?

According to XPS Pensions, 40% of all DB schemes experienced a significant increase in activity from members looking to take advantage of the new flexibility and 30% of schemes are automating the process. As highlighted at a recent Pensions Management Institute (PMI) meeting, not everyone thinks this is a good thing and it’s a debate that could just keep running.

Yes, we should

At the PMI meeting, the proposal for advertising was put by Steve Webb (Director of Policy and External Communications at Royal London) and Hugh Nolan (President of Society of Pension Professionals). The gist of their argument was:

• As IFAs point out, everyone is unique and has different circumstances. An individual knows more about their personal requirements than the pensions manager would.
• Transfers have got a bad name (again) - British Steel should have done more to help members avoid aggressive IFAs motivated to persuade the members to transfer offering advice over ‘free lunches’ - but that doesn’t mean they are all bad.
• The financially less astute do need to be protected from making the wrong decision and being enticed by hard sell tactics, but members should be allowed to make an informed choice after a legitimate conversation with the pension trustees.
• The motivation for many - and particularly those in ill health - is concern about passing on the fund to their beneficiaries, which DB members cannot do. (Gillian Graham’s Grim Reaper blog looks at this exact issue).

Freedom and choice has opened up new options and, thanks to low gilt yields, transfer values are three times higher than in 2015. It isn’t surprising that FCA figures show DB to DC transfers doubled in value to £21bn in 2017, with the number increasing by around one third to 92,000 (see this FP Today article).

No, we shouldn’t

Against the proposal was Tim Sharp (Pension Policy Officer at the TUC) and Jeanette Holland (Partner at Baker McKenzie). Whilst they were not both necessarily anti-transfer values, they felt members need to be aware of the risks. Their key points were:

• Members are vulnerable to scams and don’t have the experience to make decisions. Quality advice is “not plentiful”.
• DB members need guaranteed income and need to be protected from the lure of the carrot. A push on transfer values will lead to harm.
• Advertising transfer values can lead to a risk to the employer’s reputation. It could be taken as inferred endorsement.
• Automation of the right to transfer quotations could lead to more members giving up the valuable guaranteed pension and ancillary benefits, transferring the value of their pensions (often higher than the value of their houses) and leaving themselves open to greater risk of a lower pension.
• Bad financial advice would lead to more mis-selling cases and, by association, the pension trustees (who only have limited powers to prevent transfers) could find themselves in a tricky situation.

I along with the majority of the PMI audience voted in favour of pension trustees and sponsors not being afraid to advertise DB to DC transfers to members.

Where next?

Clearly tax on inherited pensions is a big part of the issue and HMRC is looking into this. Another question is whether government should legislate to allow partial transfers - so members can avoid the cliff edge option of transferring all or nothing. Some pension schemes allow this already but it is complex, particularly around contracted-out benefits. Given the focus on other matters like Brexit, Parliamentary time on this is unlikely.

As an independent trustee, I’m keen to see members take proper advice before taking advantage of pension freedoms. It is a major financial decision not to be made lightly.

This is big business for advisers. Many smaller employers have weaker covenants, which can lead to members transferring in the belief the receiving scheme provider has a stronger covenant without understanding all the other risks involved. The FCA is looking into IFA practice around unsuitable transfers and we may see new rules, guidance and a new pension transfer analysis (starting from the basis all transfers are unsuitable) coming into force late this year or early next.

Yes, the ban on cold calling is now to be enacted this Autumn, the FCA and Pensions Regulator provide guidance for members looking to avoid scams and Pension Wise is available to help members understand their defined contribution pension options, but pension trustees need to play their part in helping members make an informed choice too.

Relying on historic standard letters is not good enough. Reviewing your scheme’s communications around transfer options and when transfer values are provided is vital. As is often the way, for pension trustees, communication really is key.

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