The changes to the British Steel pension arrangements brought DB transfers back into the headlines in December. While a lot of the story focused on ‘advisers’ whose aim seems to be more about feathering their own retirement nests than helping the members themselves, it did highlight a number of material points which will resonate with many schemes.
Most schemes have faced an explosion in transfer requests over the last three years. This has been triggered by members and their advisers wishing to address the fundamental question of how members should use all their savings to fund their retirement and not just how to “spend” their DC funds under the new pension freedoms. In many cases, the transfers on offer in current market conditions for DB benefits can be very large compared with any DC benefits, and it is easy to lose sight of the fact that the transfer value reflects the inherent guarantees in a DB entitlement. Many members decide that staying in their DB scheme is the right decision for them to ensure security for what could be a significant part of their retirement income. But, in some cases a transfer (or, if permitted, a partial transfer) may be in their best interests because of the greater flexibility to tailor a DC benefit to their own circumstances. What is clear from the first three years’ experience of pension freedoms is that the more choices members have, the more difficult it is for them to make the right decisions. Good financial advice is crucial in this process, but this is expensive and can be difficult for members to access.
What is clear from the first three years’ experience of pension freedoms is that the more choices members have, the more difficult it is for them to make the right decisions.
The FCA is already looking at the adviser’s role and is due to publish its conclusions this quarter. Various other bodies are looking at parts of the transfer process. However, there may be more that trustees can do themselves, as they will often be the natural first port of call for many members looking for help in navigating their retirement options. When the pension freedoms first came in, many trustee bodies took the view that they would be reactive to member transfer requests at retirement as there were risks of getting too involved. Some lawyers now suggest that, for trustees, not communicating all options is the more risky approach. As long as they are balanced and compliant, better communications and processes can only be to the benefit of all parties. Trustees should actively consider the stance they are taking and make a clear decision that is right for their members.
A starting point for many trustees has been to revamp their retirement communications, putting a transfer illustration alongside the pension quotation. By doing so, they can often reduce their own workload as this should reduce the number of ad hoc queries. Others have gone further and made financial advice available, or identified well-qualified advisers that members can contact and, in some cases, have negotiated competitive terms. In a hybrid scheme this advice might be part-funded from members’ accounts through the new pensions advice allowance. While this all sounds expensive for the scheme, it isn’t necessarily the case: a transfer removes the future cost of administering a member’s pension for 20, 30 or more years (possibly more where dependants are involved), so if more members transfer, the future administration savings will often cover the up-front costs and possibly any advice provided. Evidence suggests that if members are properly advised on their retirement options, it is more likely they will make the right decision for them.