Posts Tagged ‘Enhanced Transfer Exercises’

David Davison

Many years ago an old auntie used to tell me to be careful who I pointed the finger of blame at, as only one finger would point at them and the other three would point at me. Wise words indeed – and possibly something that the Pension Regulator should pay some heed to when making pronouncements.
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Neil Copeland

As those of you who know their French medieval history will recall, Arnaud Amalric was the Abbot of Citeaux at the time of the supression of the Cathar heresy in the Languedoc. The French Catholic king of the time, with the blessing of the Pope, had launched the Albigensian Crusade , aimed at exterminating the heretics. Because the Cathars had for many years lived happily amongst their Catholic neighbours, the crusaders were presented with a problem – how can we tell the “good” Catholics from the “bad” Cathars before we exterminate them?

This is where Arnaud comes in. Arnaud was what we would call in morden parlance, a pragmatist. He was with the crusaders beseiging Beziers, presumably to provide spiritual and moral guidance. Beziers had a mixed Cathar/Catholic population. When asked by his military colleagues for some guidance as to how they could distinguish the religious adherence of Beziers’ inhabitants in the forthcoming massacre and therefore avoid killing their “good” co-religionists, Arnaud came up with a splendidly pragmatic  response – “Kill them all, the Lord will recognise His own.”

Now don’t get me wrong, generally I see pragmatism as a virtue, but I’m not entirely convinced that, in this case, the end justified the means.

Equally, I am unconvinced that the effective banning of Contracted out DB to DC transfers hidden in the regulations regarding the abolition of DC Contracting-out is entirely justified.

The Government’s approach here seems akin to that of Arnaud. The proposed ban is clearly about a failure of regulation. There are many legitimate scenarios where transferring from a Contracted-out DB scheme to a DC arrangement of some sort makes sense for individuals, given their particular circumstances. Given this, and the fact the the Government will not have sat down with any individuals to ascertain what is or isn’t in their interests, killing all Contracted-out DB to DC transfers seems as overzealous now as Arnaud’s response all those years ago.

So rather than a medieval approach to the issue of transfers and regulatory concerns about protecting members from themselves, can we  have some proper regulation?

By this I emphatically don’t mean the recent consultation document issued by the Pensions Regulator on incentive exercises. It has always been my view that transfer advice is regulated by the FSA and trustees should not be forced to provide a figleaf for any regulatory failings in this area – see our other blogs on this point.

Having said that I think that the guidance around the trustees’ role in this area seems to have completely missed the point that trustees do indeed have a legitimate existing role in the process which could help resolve some of the concerns voiced. It is already the trustees responsibility to set scheme transfer values. The Regulator in its guidance in this area suggests that these can be a ‘best estimate’ of the value needed to replicate the benefits being given up by the member. So setting the transfer value basis for a Scheme rests squarely with the trustees.

If trustees and the Regulator have concerns about members losing out as a result of transfers, even where these are topped up to the full transfer value provided by the Scheme, or beyond, then clearly part of the problem must be the trustees’ transfer value basis.

In my opinion the biggest and best contribution trustees can make to the whole transfer value debate is to make sure that their transfer value basis genuinely reflects the value of members’ benefits.

Obviously this is yet another area where there is a potential for conflicts of interest – some trustees might be tempted to set weak transfer value bases with a view to facillitating positive communication in employer sponsored transfer exercises. A 20% “enhancement” to a weak scheme transfer value could well be less than 100% of a “fair” transfer value and mislead members into thinking that they are getting something “extra”. This is properly an area for scrutiny by the Pensions Regulator and another argument for the appointment of a professional trustee to any Scheme where potentially contentious issues are to be addressed.

This may raise the bar for transfer value exercises by increasing the amounts of any top ups required from the employer – but surely this is a good thing? Transfer exercises would then – quite rightly – be difficult to do “on the cheap” as disclosure requirements would mean that the full transfer value has to be disclosed to the member and any attempt to “incentivise” members’ to transfer out at a level below this would be very apparent to them.

I have to ask if this would not be a simpler and more joined-up solution than a blanket ban by stealth, which appears to be where we are heading?

Brian Spence

At the end of July by the Department of Work and Pensions published a consultation document entitled  “Abolition of contracting-out on a defined contribution basis: consultation on draft consequential legislation.

Hidden within the document (it takes some finding) and then cross referencing  the Contracting-out (Transfer and Transfer Payments) Regulations 1996 (what would we do without Pendragon Perspective!) and it becomes clear – no transfers of GMPs or of post 1997 contracted-out rights will be permitted from DB pension schemes to either occupational DC pension schemes or to personal pensions from 6 April 2012.

Who saw that coming?  The vast majority of DB pension rights are now locked into the DB pensions funding regime until the last member dies, a regulated buy-out is transacted or the sponsor goes bust.

Deferred pension scheme members who may have been thinking for some time about transferring to a personal pension will need to make their mind up soon.  There is a minority of people who would be well advised to take transfers, for example some of those in poor health or without dependents.  Schemes will undoubtedly have to deal with an increased incidence of transfer requests for 18 months and virtually none thereafter.

The whole new industry that has developed around transfer incentives will come to an end.  From the point of view maximising individual choice this is not a good development but there are a number of practitioners who have advised employers to conduct enhanced transfer value exercises in a manner that will in all likelihood result in many of those members who have been advised to transfer coming to regret the advice they have received.

The Pension Regulator’s recent consultation on the subject seemed a rather limp response to some very poor practices on the part of some advisers but maybe this latest announcement goes some way to explaining why.  If the Pensions Regulator and the Financial Services Authority cannot regulate Enhanced Transfer Value Exercises (and certainly over the last few years it is clear that they have failed to do so) then banning transfers seems a logical step.  Whilst we understand the move by the new Pensions Minister Steve Webb, it is a pity that the price of this regulatory failure is to deprive the minority of people who could gain by transferring of that option. It is a price worth paying to protect the majority from the detriment caused by the predatory and harmful practices that have developed.

The whole area of calculating transfer value equivalents to DB benefits has been fraught with difficulty – the mis-selling of the late 1980s and early 1990s having been improved on by some firms only a little in more recent years.

There does however seem to be a high chance of a firesale over the next 18 months as individuals take a final look at their affairs and decide once and for all on whether to transfer out to a personal pension or DC scheme and as employers contemplate making a final and best offer to incentivise deferred members to take their liabilities and leave the scheme.  Hopefully employers and trustees will take the proposed new Guidance from the Pensions Regulator to heart and conduct these exercises in an appropriate manner.  The appointment of an independent trustee in such cases to eliminate conflicts of interest would be good start.

We have argued several times that transfer incentives properly conducted are a legitimate and proper technique for employers to manage their liabilities and at the same time would be happy to advise any employers looking to achieve a fair win/win result in the limited time that now appears to be available or indeed any trustees seeking to meet the demanding new expectations of the Regulator.

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

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