Pension scheme trustees must look at big picture
PENSION schemes are being encouraged to consider whether they are being too generous when offering cash lump sums to people considering transferring out of their gold-plated deals.
A letter sent by the Pensions Regulator to defined benefit (DB) pension schemes suggests that trustees think about whether they should cut the amounts on offer for workers leaving the pension scheme.
DB schemes are often described as gold-plated because they promise people a certain level of income when they retire, such as final salary pensions.
The letter was obtained by Royal London following a freedom of information (FOI) request. It been sent to pension schemes experiencing a large volume of transfers, as part of efforts to protect members from unsuitable transfers and pension scams.
Giving a general indication of how much those who transfer out may potentially receive, Sir Steve Webb, director of policy at Royal London, said people are routinely offered 25 to 30 times their annual pension as a lump sum transfer value – but some schemes have been known to offer as much as 40 times.
This could mean that for a £10,000-per-year pension someone may find they are offered £250,000 to £300,000, but the amount on offer could be as high as £400,000.
The former pensions minister said a particular concern appears to be a situation where workers transferring out are offered a cash lump sum on relatively generous terms at a time when the pension scheme itself is in deficit or the employer is regarded as vulnerable.
If large numbers of members transfer out on generous terms there would be a risk that the funding position of the scheme could worsen and the risk of remaining members not getting their increase.
Sir Steve said: “I would hope that well-run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out. But the regulator’s letter is a helpful reminder to all schemes that they need to be fair not only to those transferring out but also those left behind, especially where the scheme in question is in deficit.” full pensions could
DB schemes have become more thin on the ground due to being expensive to run as people live for longer.
They have increasingly been replaced by defined contribution (DC) pensions, where the saver bears the risk as to how much retirement income they will eventually end up with.
The letter tells schemes: “We would expect you to take advice from your scheme actuary about whether the basis on which CETVs (cash equivalent transfer values) are calculated remains appropriate.
“We would also expect you to consider whether a new insufficiency report should be commissioned from the actuary.
“This would allow you to judge whether a reduction or further reduction should be applied to CETVs in light of their assessment of covenant strength.”
The letter says the regulator is aware that the level of transfer activity in the pensions industry has increased significantly in recent years.
It says: “Taking a CETV presents certain risks and we believe it is likely to be in the best financial interests of the majority of members to remain in their defined benefit (DB) scheme.”
Trustees are expected to explain that, in transferring away from their scheme, members would be giving up a guaranteed future pension income in return for income that is not guaranteed and will vary depending on how they manage it, the letter says.