Overgenerous cash transfers risk killing “Defined Benefit” Pension schemes

The UK Pensions Regulator has written to 14 schemes’ Trustees warning them not to be overgenerous in their cash equivalent transfer values (CETVs). The Pensions Regulator (TPR) said it wanted to remind Trustees of their responsibility towards those remaining in defined benefit (DB) schemes as well as those cashing out. The letter emerged after Steve Webb, Royal London’s director of policy, applied to see it through a freedom of information request.

The TPR letter, which was sent in February, states: “In light of recent events concerning your scheme’s sponsor(s), we would expect you to take advice from your scheme actuary about whether the basis on which CETVs 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.” Among other reminders, the letter also says schemes should be electronically recording the details of each transfer, including Financial Advisers’ names.

Warning to members

Lump sum pay-outs are being made, with six figures not uncommon, but how long will these last? Despite the warning, Pension transfer cash-outs greater than £30,000 (€33,149, $38,641) require the input of an Independent Financial Adviser regulated to provide transfers.

High volumes of cash equivalent transfer valuations

Commenting on the revelations, Greg Pogonowski, Senior Associate and Head of Retirement Policy at Lime Financial said, “The actuary’s calculations and existing safeguards should be enough protection for consumers. The Pensions Regulator’s reminder… is a logical course of action given the volume of transfers from some schemes. Trustees should be monitoring and reviewing the appropriateness of the assumptions underlying the calculation of transfer values, and there is no suggestion that Trustees aren’t taking this seriously.”

Steven Cameron, Pensions Director at Aegon, agreed: “It is interesting that The Pensions Regulator has chosen to write to only 14 schemes, suggesting particular concerns for them, and that this has emerged only under a freedom of information request. It does highlight how difficult it is for Trustees, with their scheme actuary’s help, to strike the right balance, as too cautious an approach might lead to those who transfer out receiving less than their fair share. This is made even more complex as changes in economic conditions and investment performance can produce quite sharp changes in scheme funding levels over relatively short periods of time.”

Getting the balance wrong

A spokesperson for The Pensions Regulator said: “Our primary concern is that DB scheme members requesting a CETV have all the information they need to make an informed decision about what is in their best interests. This includes understanding the fees that are charged under any new pension arrangement as these can make a significant difference to the value of the fund. As a result, we are working closely with the Financial Conduct Authority and The Pensions Advisory Service to provide an increased level of support to trustees and scheme members where there is uncertainty around the future of a DB pension scheme.”

With more and more UK Pension schemes in deficit, and wanting to get rid of as much liability as possible and as quickly as they can; if YOU have a paid-up (“frozen”) UK Pension from a previous employment, maybe time to speak with me and get the best deal possible, before any Regulator reduces YOUR money…….?




email: greg@yourmoney-matters.com