Rarely a day goes by without some press comment on the use of Enhanced Transfer Value Exercises as a legitimate (or not!!) form of final salary pension scheme de-risking. So we thought we’d get some informed comment from someone who actually has experience advising members on these exercises. Our guest contributor, Matthew Smith, is a highly experienced and qualified financial adviser, with leading Independent Financial Advisers Argyle Consulting, who has carried out a number of these exercises and outlines here what he considers are the real issues and choices members face.
(Argyle Consulting Limited is a leading firm of Independent Financial Advisers based in Scotland.)
Sponsoring final salary schemes is a pretty thankless business, and with a limited number of options open to employers to manage liabilities, an Enhanced Transfer Value (ETV) exercise conducted in an open and professional manner with employer funded IFA advice, remains an option worthy of serious consideration.
This is despite the entirely valid opprobrium heaped by the Pensions Regulator (among others) on some reported exercises that have bordered on sharp practice by employers at best.
Apart from the criticism of patently poor procedural conduct, there’s an undercurrent of hand wringing which seems to based on 1) that members need to be protected from themselves (and the big bad employer!) and 2) that there’s no way Joe Average can really understand or assess the value of the guarantees they are giving up.
It’s certainly not an IFA appetite for reckless endangerment which is encouraging members out of schemes. The pensions review of the 90’s may be a fading memory, but final salary transfers remain the highest risk business an IFA can conduct from a regulatory, reputational and business survival perspective. Get it wrong and you won’t be around for long!
As an IFA it’s meeting the personal objectives of the individual, not the protection of the many that gives a different starting point to our view, ever mindful of the fact that all transfer advice must start from the FSA stance that it is not in a member’s best interests to give up any guarantees.
But if the prevailing message from regulators is ‘beware of employers bearing gifts’ which right thinking member would take such an offer anyway, and why? How can these exercises be done effectively for the employer, with proper governance and protections, and be balanced and not misleading to members?
Despite what the actuarial modelling might forecast about the value of the guarantees implicit in a final salary pension promise, each member places an entirely different ‘value’ on the real benefit of these guarantees to them, depending on their personal circumstances.
A few (real life) examples that can be taken in conjunction with a fair transfer offer and sensible critical yield would include early access, for example, the redundant employee in his 50’s who has been unable to find another employment and has used his lump sum to fund a business start-up.
Members do tend to underestimate their own life expectancy but the single member who is not in robust health is another example where a transfer giving up dependents pensions and possible increases can make sense. Conversely the married member with a large pension entitlement from their spouse may feel no need of the guarantees or dependents benefits.
The reality is most members who decide to transfer with the benefit of balanced professional advice make an entirely rational decision on the basis of control of funds and greater immediate or future access flexibility. Retirement is changing and pension entitlements for many deferred members are small and inflexible in relation to their other earnings, assets and entitlements, and are valued as such.
Much of the unease seems to be that somebody out there is duping Joe Average into thinking he’ll get a better pension on the basis that it’s an enhanced offer, rather than the reality which is that members in properly conducted exercises are making an informed choice to opt to transfer out of schemes in most cases for greater flexibility and control.
It’s not all about the numbers, and members are quite capable of making the value judgement, as long as a sophisticated professional adviser is explaining the issues to them in a way they can understand.
For employers thinking of spending the money on an ETV exercise our advice would be:
1) Make a fair offer, this is not a cheap option and setting enhanced transfer values that don’t get past the first base of a low critical yield to allow members to have a chance to transfer is a waste of everyone’s time. Don’t offer cash, it’s difficult to assess its real value and could be regarded as an unfair inducement.
2) Engage with and appoint an IFA firm that has the relevant depth of technical experience, staff with the right qualifications, a robust process, and crucially the individual member communication skills to engage members at a high level on what can be a complex decision. This will be critical to the success of any exercise and also to help reassure your trustees.
3) The employer needs to fund properly for the communications and member advice, and allow the member sufficient time with the adviser for decisions to be made. Members won’t transfer if the advice is generic or feels impersonal.
Sponsoring employers should not shy away from considering the merits of an ETV exercise, but the involvement of an experienced professional IFA practice at an early stage is critical to ensure it is money well spent.