While some schemes are facilitating DB-DC transfers others are more hesitant. Michael Klimes looks at why this is happening
- Various sectors of industry have different take on DB to DC transfers
- Industry cannot afford a scandal from poor DB to DC transfers
In June a Pensions Buzz survey revealed the majority of respondents believed the Financial Conduct Authority (FCA) was right to rule pension transfers over £30,000 should be handled by transfer specialists.
While many welcomed the freedoms for people to do as they wished with their money, it was still thought they needed some level of protection.
The debate about the trade-off between freedom and security is very much at the heart of discussions around defined benefit (DB) to defined contribution (DC) transfers. Trustees have their work cut out trying to see where the line is.
Some believe the stream of warnings about potential bad outcomes for members is counter-productive. Premier Pensions head of administration services Dan Taylor thinks the industry has reached a tipping point.
At Premier Pensions members requesting retirement quotes are automatically given transfer quotes as well. However, this is not standard practice across the industry according to Taylor.
"A lot of trustees are very nervous about doing that because they are worried it could be seen as an invitation to transfer rather than just information," he says. "This is what you should give to your members to highlight there are other options available. However, everything they [trustees] read from the Pensions Regulator [TPR] is so much in the direction of ‘do not do anything to suggest DB to DC transfers'."
Towers Watson actuary Sanjay Gupta finds many trustees in the DB space are divided about transfers.
"There has been a huge amount of debate whether to quote transfer values on retirement statements," he says. "I have got some trustees who are adamant they want to show transfer value statements on retirement quotations because they want to give full information to members. But other trustees, say 'no way', they don't want to show transfer values."
Yet Law Debenture director Inder Dhingra says his firm's experience is different. "There was considerable hesitation initially as trustees wanted to ensure the best interests of the members were taken into account," he says. "However, over time the regulator has given considerable guidance and made trustees' and individuals' rights and responsibilities clear. So now there is very little hesitation among trustee boards - although some concerns remain as to whether some individuals are indeed doing the right thing."
JLT Benefit Solutions chief actuary Hugh Nolan argues the explanation for any reluctance about transfers is fear. "There is definitely hesitation on DB to DC transfers," he says. "The TPR and FCA have sounded warnings that these transfers may not be in the best interests of members so trustees are understandably nervous about allowing or advertising the option. Financial advisers are reluctant to recommend a transfer and even providers are wary of accepting such transfers."
Trustees are in a role that is increasingly burdensome, and this is partially due to the suddenness of the pension reforms. "Our elected politicians have decided that people should be given flexibility and trusted to manage their own money so it seems odd that the pensions industry is standing in the way," continues Nolan.
For her part, Taylor Wessing partner Rosalind Connor argues the industry has not worried enough about DB to DC transfers. She says: "I would argue that people have spent possibly too long not being nervous enough about the issue because there are so many risks attached."
While there are legal risks, Connor argues a deeper danger around transfers is the sort of members it might upset. She adds: "If people make a decision that in the end turns not to be the right one for them and they are upset about it and they are retired, those are not people you want to have making complaints against you because they will be dogged, passionate and feel wronged."
The stakes are high for the industry if transfers go wrong. "We are aware of the pensions mis-selling scandal in the late 1980s and the amount of damage it did to the pensions industry," she continues. "We don't want there to be another one and I believe a number of people think transfers from DB to DC might become the kind of scandal in the sense that people will make choices that they perhaps did not fully understand."
For Nolan, trustees must tread a fine line. He adds: "Trustees should not 'promote' DB to DC transfers to their members but neither should they unduly restrict the member's statutory right to exercise a transfer option. I believe trustees have at least a moral duty to inform members about key options available to them and this must surely include the right to transfer to a more flexible environment that might suit the individual better."
However, is there a danger of looking too much into schemes that are not providing transfers straight away? For instance, Pearson trustee Padraig Floyd says his scheme was hesitant to provide transfers given that 2015 is a valuation year.
"We are determined anyone wishing to access their DB must transfer all of it, we are not facilitating partial transfers. It's all or nothing once they demonstrate they have taken the appropriate advice."
How transfers turn out for the industry as whole in the long term is anyone's guess. What is clear is the reputation of the industry will not be helped if there is a scandal around botched DB to DC transfers.
- Check whether the member is entitled to take a transfer
- Seek any discretion needed from the trustees
- Check the member has taken financial advice (where applicable)
- Ensure discharge forms are robustly drafted
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