Is greater clarity needed on DB transfers?
At a glance
- A survey demonstrates confusion about where responsibility to support members wanting a DB transfer falls
- Should not be a legal requirement for trustees to bear responsibility, but is best practice
- Regulator should come out with principle-based messaging to reassure trustees
Research highlights confusion about where responsibility to support members on transfers lies. Kim Kaveh looks at the key findings
The introduction of Freedom and Choice in 2015 triggered swathes of over 55s requesting to transfer out of their defined benefit (DB) pension.
Earlier this month The Pensions Regulator's (TPR) latest estimates revealed that 100,000 DB transfers took place in the 2017/18 financial year - a 25% rise on its estimate of 80,000 between 1 April 2016 and 31 March 2017.
A Hymans Robertson report - A better future for members, supporting good retirement choices - found that 95% of trustees and sponsors are concerned about the consequences of their members getting inadequate support for their retirement choices.
The report notes there is too much confusion among trustees and scheme sponsors about whose door the responsibility for educating and supporting member choices falls at.
Hymans Robertson partner and head of member options Ryan Markham says: "The main focus of the report is on DB transfers because it is the catalyst for giving members a choice.
"The study reveals it is clear this is an issue and something needs to happen, as members are being left to fend for themselves."
Some 100 trustees serving corporate, non-public sector DB schemes with assets of £50m and above were surveyed in December.
A further 46 chief financial officers, financial directors of companies with 1,000 or more employees, and 31 professional independent trustees were surveyed in January.
Confusion
Respondents were asked where most of the responsibility should lie when it comes to educating members on their retirement options.
Some 14% of trustees said it should be the government. This was also the case for 13% of sponsors and 16% of independent trustees.
Under a third (29%) of trustees said responsibility should lie with the individual, compared with 43% of sponsors, and 32% of independent trustees.
Meanwhile, just under one in 10 trustees said it is the employer's responsibility, compared with over a quarter (28%) of sponsors and 16% of independent trustees.
Over a third (35%) of trustees said it is the trustee's responsibility to educate members on their retirement choices. This was the case for 15% of scheme sponsors and just over a quarter of independent trustees.
It is not a trustee's legal responsibility to educate and support members wanting to transfer. However, it is best practice, says Dalriada Trustees senior trustee representative Hugh Nolan.
"I'd hate for it to be a legal requirement for them to take responsibility because I don't think they are well-geared to do so.
"The advice from the independent financial adviser (IFA) should be right, but we know in the real world it isn't always the case."
If a member has a pension pot of £30,000 or more, they are legally required to see an IFA before the transfer is allowed to proceed.
Nolan continues: "So you as a trustee can - if you choose to - take those steps to enhance member experiences by making sure they have clear information about the scheme and what they are giving up - so they are making a fair comparison."
Trustee role
But have schemes adopted a 'best practice' approach?
A separate Aon survey demonstrated that 16% of schemes are "just following statutory requirements", and over half (55%) said they include wording in retirement packs about the transfer value option, but not figures.
The survey was carried out in February and covered 300 schemes ranging across all sizes from less than £10m to over £1bn of assets.
Under a fifth (18%) said they include figures in retirement packs setting out the transfer value amount, and one in 10 said they provide members with figures in retirement packs along with online modelling tools and/or paid for an IFA.
The question here becomes to what extent trustees advertise these options, according to Nolan.
"Do you want to make sure at the point of people making these decisions they realise they've got the choice, or do you wait for the member to raise it with you?
"You could, for example, include the option in the annual statement, but that is open to debate about the philosophical angles of it. Personally, I take the view that giving members information is unlikely to be a bad thing."
Regulatory bodies
It is also important to consider the role of regulatory bodies.
The Financial Conduct Authority (FCA) should "properly regulate the transfer business, and ensure IFAs are competent to act in this area," says Nolan.
But TPR's position is also important. Markham argues the regulator needs to come out with principle-based messaging to reassure trustees that "you don't have to be fearful of crossing advice lines by giving members the right information in the right way and at the right time."
A TPR spokesperson comments: "Our primary concern is that DB scheme members and their advisers have all the information they need to make an informed decision about what is in the members' best interests. We are working closely with the FCA to achieve this.
"The provision of accurate and timely information from trustees to members and their advisers, and the use of independent regulated financial advice will enable members to make informed decisions that suit their personal aims and circumstances, working with their regulated financial adviser to do so."
There is confusion about who holds responsibility for supporting members transferring out of their DB pension. It is important for trustees to be clear on their responsibilities and have enough guidance so they can help members make informed decisions.
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