Helen Morrissey looks at the implications of the Treasury announcement on transfers.
According to a written Ministerial Statement issued this morning the Treasury has opted to allow transfers from private sector defined benefit (DB) schemes to defined contribution (DC) schemes. The news was expected but came with two important caveats.
First of all transfers will only be allowed if the individual takes regulated financial advice. This advice will need to be independent of the scheme and taken from a body regulated by the Financial Conduct Authority (FCA).
The cost of this advice is likely to be met by the individual unless they are looking to transfer from the DB to DC schemes within the same scheme, or as a result of an employer-led incentive exercise.
The FCA has also published a thematic review on enhanced transfer values out of defined benefit schemes, summarising examples of good and bad advisory practice.
Secondly the Treasury is to publish guidance for trustees on how to use their existing powers to delay transfers from schemes if the scheme is at risk, and to reduce transfer values to reflect scheme funding levels.
This was in response to concerns that if large numbers of a scheme's members wanted to transfer out it could put pressure on funding levels.
However, the statement added that it was "unlikely that the number of members of defined benefit schemes wishing to transfer would be sufficient to destabilise any individual scheme."
There was no change in the current position that bans current DB pensioners from transferring to a DC arrangement.
Should this be relaxed then the "scenario would place significant risk onto the pension fund, and would be unfair to remaining members, and could require schemes to increase their funding requirements," according to the Treasury.
The statement was welcomed by the industry with many believing the practice was in-keeping with the freedoms announced in the Budget.
Eversheds head of pensions Francois Barker says: "I am pleased to see that the government will continue to allow transfers from the vast majority of DB schemes (including funded public sector schemes) to DC schemes. The Budget was all about giving people flexibility and choice and banning DB to DC transfers would have sent out a very confusing message. The safeguards announced should help to ensure that individuals are in a position to make an informed decision about whether or not to transfer."
However, he adds that care will need to be taken to ensure that "the financial advice that members receive is appropriate".
This is potentially a significant issue. If the advice needs to be taken from someone independent of the scheme how can members verify quality of that advice and will they be willing to pay for it?
"I suspect there are IFAs out there to provide advice but beyond the top tier of advisory firms I would have concerns regarding the quality," says Xafinity senior actuary Chris Fletcher. "Will we see the government look to regulate this more carefully?"
Fletcher believes schemes may need to step in to safeguard the quality of advice by potentially putting together panels of IFAs willing to advise scheme members.
"Do we really want people going to back street IFAs and potentially getting poor advice? The last thing trustees want is members coming back to them in years to come," he says.
Another potentially sticky area for trustees concerns their powers to delay transfers. While such powers are there to safeguard the scheme there are concerns that trustees could face complaints from disgruntled members.
"Trustees do have the ability to put transfers on hold and there is a chance members could get annoyed if they can't get access to what they want," he said. "Trustees need to look carefully at how they communicate this to members."
However, Aon Hewitt partner Lynda Whitney believes the scope for complaints will be limited: "I think it would be difficult because trustees have to look at what is best for all members of the scheme," she says.
How many could transfer out?
So how many people are expected to take advantage of this new flexibility? The Treasury notes it received a range of estimates during the consultation as to the number of people expected to want to transfer.
Its statement reads: "The majority of estimates were between 10% and 20% but with a number expecting transfers to be below 10%. These estimates are consistent with stakeholder feedback that the Budget announcements had resulted in only a very small number of additional requests for transfers."
However, while 10% may not seem like a big number Whitney believes this could equate to between £6bn-£12bn leaving DB schemes in the first year with between £3bn and £6bn leaving annually after that.
"While this may not seem like a lot when you consider the £1.1trn of assets in DB, administering this will be a major headache for schemes as you will get members ringing up to ask for a quote even if they then decide not to proceed," she says.
She continues: "Schemes also need to consider that they don't have a lot of time to do this given that people retiring in April next year will get their wake up packs in October. Schemes need to sit down and work out what they are going to tell people."
She advises schemes to take note of the enhanced transfer value exercise guidance when looking at how to communicate the process with employees.
"These processes can be carried out in a positive way," she says. "They are not easy exercises though and will need a lot of long-term planning."
So while it is a good thing that these caveats have been put in place with DB to DC transfers significant challenges will remain.
Ensuring scheme members get access to good quality advice and communications around the subject will be key. Unfortunately it looks like schemes will not have a lot of time to prepare and they will need to act quickly if they are to meet demand.
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