Posts Tagged ‘Pension Transfers’

Richard Smith

We are only days away from 6 April 2015 when the new pensions freedoms take effect. Communication of the upcoming changes is being ramped up in the popular press, and this will undoubtedly lead to increased interest from members in gaining access to their pensions savings.

The game changer is the complete flexibility for over 55s to take their pension benefits from a DC scheme in whatever manner they wish. Many defined benefit (DB) scheme members will be demanding similar flexibilities from their own pension arrangements. Legislation does not yet allow DB schemes to offer this, so we would expect there to be strong demand from DB members to transfer their benefits into a defined contribution (DC) scheme at retirement in order to access these.

The new norm will be for members to request transfer value quotations at least annually from age 55. A large number of retirees will elect for the security of the traditional DB pension, but a significant proportion – perhaps the majority – will transfer out in order to take control of their savings.

What should trustees and employers be doing as a result? If this is managed properly, there is a real opportunity for a win-win-win for members who receive their benefits in a manner that is more valuable to them, for employers who benefit from a smaller more manageable scheme and a reduction in exposure to cost increases as liabilities transfer out, and trustees who are able to deliver tangible value to their members and reduce risk levels in the scheme.

One thing is for certain: doing nothing is not an option. Read more »

Richard Smith

(Spence & Partners latest blog for Pension Funds Online )

Last week I had the pleasure of chairing a session at the annual conference of the Association of Consulting Actuaries. I had high hopes for an interesting and interactive session, and was not disappointed. The slot was entitled “Current issues in corporate pensions” and you don’t need to work in the industry to know that we are currently experiencing some pretty momentous issues in the corporate pensions space.

The speakers had rather optimistically chosen six topics to cover in their hour-long slot. I say rather optimistically, as we only had time to cover about half of them. Listening to the presentation and the subsequent debate, I was struck by the sheer scale of the challenges that lie ahead for the unwary employer over the coming months. Read more »

Mike Spink

DC scheme sponsors and trustees can now proceed in earnest to review their schemes and ensure that they are fit for purpose from April 2015.

A number of organisations will have been waiting upon this week’s announcement before moving forward. This revolved around the action that the Treasury would take to mitigate reduced tax receipts as older workers used the new freedoms to potentially draw their salary more tax efficiently from next year. There was a very small risk that the new pension freedoms might have been curtailed given the scale of the Treasury’s potential tax losses, but George Osborne has confirmed that this issue will be addressed by placing new restrictions on the level of future contributions eligible for tax relief once maximum tax free cash has been taken.

DC sponsors and trustees will be pleased to hear that the Guidance Guarantee will be provided by independent organisations (The Pensions Advisory Service and the Money Advice Service are mentioned as ‘lead’ organisations) with the costs being funded by a levy paid by the Regulated adviser community. The Financial Conduct Authority has issued a Consultation around the elements of the Guarantee for which it will be responsible. As such, we await further details before a clear picture of the mechanics of the Guarantee becomes clear. Read more »

Susan McFarlane

Spence & Partners, the UK pensions actuaries and administration specialists, have said that today’s announcement on the continued permission for DB to DC transfers should be a catalyst for trustees and scheme sponsors to work more closely together.

Marian Elliott, Head of Trustee Advisory Services at Spence, commented: “Immediate actions for trustees will be in communicating the outcome of these announcements to members and liaising closely with the administrators on the processes that will be needed to comply with the guidance guarantee. Trustees should also be prepared to collaborate with employers on any de-risking exercises that take place and consideration should be given to whether scheme design is affected by the announcements.

“Trustees should also monitor what impact the announcements may make to the scheme’s risk profile, should a significant number of members opt to transfer out. Trustees should not react by overhauling their strategy, however more consideration should be given to liquidity issues and funding monitoring, so that trustees can react quicker to the need for strategic adjustments. Other considerations for schemes will be around whether assets are sufficient to meet the needs of the potential increase in transfer requests on the back of this announcement, as this may involve an agreed funding top up with the sponsor.”

Alan Collins, Head of Corporate Advisory Services, added: “The announcements today should be welcomed and treated by employers as a trigger for positively managing their scheme liabilities. With the prospect of DB members looking to move to the far more flexible defined contribution market, employers should review their on-going plans for the scheme and target available resources to fund transfer exercises. Defined benefit schemes continue to present a significant risk to employers, but with this announcement building on recent easements in The Pension Regulator’s approach to funding, employers can start to manage that risk more effectively.

“More individuals have been contacting administrators to request transfer quotations since the proposals were first announced in the budget, so it is important that everything is managed correctly by the employer and scheme from the outset. I welcome the requirement for mandatory indpendent advice on DB to DC transfers. The time is right for employers to work with their trustees to make sure that this advice is on tap for all members making decisions in relation to their scheme benefits.”

David Davison

I read with interest the comments made by TPR Chairman David Norgrove about the use of transfer incentive exercises, Mr Norgrove suggests that trustees should become heavily involved in policing such exercises. He also suggests that trustees’ default position should be to treat exercises with scepticism and asserts that they are unlikely ever to be in the members’ interests.

Yet only a week earlier, as reported in our blog,  Fraser Sparkes from leading legal firm Hammonds was suggesting that trustees should not become involved with ETV exercises as it goes beyond their trustee responsibilities. As if being a trustee wasn’t complicated enough!!

Mr Norgrove also described a number of “worrying tactics”  including the offer of advice paid for by the employer, on the condition members take that advice, excessive pressure to make a decision and the provision of misinformation. Whilst clearly I would not condone any of these tactics it would be interesting to know just how widespread these abuses are or if a few isolated incidents are colouring the Regulator’s view as a whole.

The provision of independent financial advice on pension transfers is one of the, if not the, most heavily regulated areas of financial advice and it’s hard to believe that such practices are widespread where IFAs are involved in the process. If the abuses alluded to by Mr Norgrove are indeed widespread, then surely it represents a very significant breakdown of the regulatory process and the FSA need to be provided with names of the parties involved to allow them to investigate thoroughly and take appropriate action.

In my experience highly reputable firms of IFA’s with highly qualified advisers who offer to provide transfer advisory services do so based upon the facts and figures presented to them and take a very cautious approach to any positive recommendation to transfer. All parties work within the guidance issued by the Pension Regulator in January 2007. In our view there is no benefit to a company in doing anything other than ensuring that members can be clearly demonstrated to have made an informed decision as regards their pension options in this scenario. To do otherwise is to leave open the possibility of a member claiming that he did not understand the decision he was making, or worse, was actively misled, and a court or tribunal directing that the liability has therefore not been properly discharged, with the Employer held to be still liable for the “transferred” pension benefits.

As noted above Mr Norgrove also states that “In general it is unlikely to be in members’ interest to transfer out of a DB Scheme.” However, that is not to say that it is never in a member’s interest and clearly depends on the level of transfer value offered in exchange for the benefits given up in the final salary scheme. It will also depend on a wide range of softer issues directly linked to a member’s personal circumstances e.g. health, attitude to risk, etc. I think it is very dangerous for trustees, and indeed Mr Norgrove, to make an assumption about what is in a particular member’s interests without having fully investigated an individual’s personal circumstances and objectives. Certainly any IFA adopting such an approach would be leaving himself open, quite rightly, to disciplinary action by the FSA.

Each individual will have a choice to make based upon the figures and their personal circumstances and ideally with the benefit of independent financial advice paid for by the employer. In this area there must be no additional incentive for advisers to encourage transfer, such as by the payment of a commission, but be based upon a fee payable regardless of the recommendation given.

Only if the offer represents true value for money is it likely to be recommended by the adviser and accepted by the member. Anything else just leaves the adviser open to a future claim and to pursuit by their regulatory body.

It is also interesting that by their very nature these exercises will be time pressured as any transfer offered will only be guaranteed for a limited time and as top-ups could swing wildly companies will need limit the extent of their commitment within this timescale. Frequently members are unaware of this and if pointed out could look like undue pressure is being exerted. 

When attractive top-ups are made available along with high quality financial advice, ETV exercises represent a legitimate risk reduction tool for scheme sponsors and ultimately an attractive alternative for individuals who have a right to chose what is right for them rather than having someone take that decision on their behalf.

Finally, Parliament has seen fit to make the FSA responsible for the regulation of the provision of financial advice, including advice on pension transfers. Given this, and noting the legal view mentioned above about the limits of trustee responsibility, I would question whether trustees should have a role in regulating financial advice thrust upon them as suggested by Mr Norgrove. Trustees should take their own legal advice about their responsibilities in this area and the potential consequences of any actions or inactions on their part.

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