Steve Webb discusses the tricky issue of whether trustees should include cash equivalent transfer values on member statements
One of the tricky decisions facing trustees of defined benefit pension schemes is whether to routinely include cash equivalent transfer values (CETVs) on statements to members.
With the demand for DB to DC transfers running at record levels, growing numbers of members are requesting CETVs, but is there a case for schemes to provide this information to all members on a regular basis?
At first glance, trustees might think that it is not their job to provide transfer values unless they have been asked to do so. Their role is to oversee the DB scheme rather than to tell members how much money they would get for leaving the scheme.
Knowing about the value of DB rights and the potential to reshape them through a DC transfer should not be the preserve of those ‘in the know’.
But if the job of trustees is to act in the interests of scheme members, and if they judged that it was in the interests of scheme members to be aware of the option of a transfer, then it would be hard to argue that they should only provide this information on request.
Given the complexities of pensions, many scheme members may not even know that they have an option of a CETV, so there is a case for trustees to provide this information unprompted - after all, people 'do not know what they do not know'.
Whether it is in the interests of members for this information to be provided on a routine basis is a crucial question. The case for providing CETVs is that it gives consumers more information and helps them to think through their options.
It is also likely that employers would welcome the chance to share with their present and past employees the true value of their accumulated DB rights, as many employers feel that the cost to them of providing DB benefits is much greater than the value which workers attach to them.
The counter-argument is that providing transfer value information on a routine basis might drive the 'wrong' sort of behaviour. Individuals are likely to find a lump sum transfer value a very eye-catching figure compared with the much more modest figure for the annual value of the DB pension. They may fail to appreciate that this capital sum would need to support a retirement potentially lasting for decades or that it would be eroded by inflation in a way that would not be an issue if the rights were left in the DB scheme.
On the other hand, any significant DB to DC transfer has to be informed by independent financial advice and any adviser worth their salt would be expected to talk a client through such considerations.
There is also an issue about schemes which do not communicate with their deferred members on a regular basis. Given that transfer values fluctuate on a daily basis, out-of-date pension statements with out-of-date transfer values could leave scheme members with an inaccurate understanding of their true pension wealth.
With transfer values probably at or past their peak, there would be a danger going forward that CETV figures issued now (for example) could overstate potential transfer values in a few years' time if an individual continued to rely on an out-of-date statement.
On balance, my personal judgment would be that knowing about the value of DB rights and the potential to reshape them through a DC transfer should not be the preserve of those 'in the know'.
All scheme members should be told what their rights are worth, so that they can take a well-informed (and advised) decision about whether the current structure of pension entitlements is right for them. But it is also clear that any CETV information must be communicated clearly and with appropriate caveats. Simply putting a large cash figure on a statement and leaving it at that is unlikely to be in the best interests of members.
Steve Webb is director of policy at Royal London
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