UK - Consultancy company Hewitt and UK pension buyout firm Paternoster have gone head-to-head over the issue of incentivising defined benefit pension scheme members to transfer out of corporate pension schemes.
Hewitt said it believes now could be a good time for UK employers to go ahead with enhanced transfer value exercises, since improved market conditions mean a "sufficiently generous and attractive transfer" may not hit companies' profit and loss accounts, as they might have done earlier this year under rising corporate bond spreads.
However, Paternoster has warned "the use of cash inducements by companies to incentivise defined benefit pension scheme members to transfer out of corporate pension schemes will lead to a significant loss of pension entitlement."
Kevin Wesbroom, global risk services lead at Hewitt, said: "For employers who are prepared to offer a cash option as part of the enhancement, these exercises may get more take-up than before - particularly given rising concerns over personal debt including mortgages."
He added the feasibility of the exercise still relies on the employer having the available cash and confidence to make enhancements at a time when the economic outlook is uncertain.
Mark Wood, chief executive of Paternoster, however, argued "defined benefit pension schemes are designed to pay pensions," and has now called for specific regulation of the transfer value process.
The buyout firm proposes guidelines be introduced to ensure an individual can clearly identify the pension benefits which are being given up on leaving a pension scheme and is able to evaluate this loss of benefit against the cash and transfer value being accepted.
Wood said in a statement he sees serious issues arising from the use of cash to persuade defined benefit pension scheme members to give up their scheme benefits.
For instance, transfer values do not generally pass on the full economic value of the fund due to an individual, and while this has some justification when an individual requests a transfer from a fund, soliciting an individual to transfer out at significantly less than the full economic value is unfair, according to Wood.
At the same time, cash paid by the sponsoring employer to an individual to encourage them to accept a transfer value at significantly below full economic value distracts them from the true equivalent value of the benefit lost, warned the company.
On this point, Hewitt's Wesbroom agrees: "These exercises certainly won't be right for all employers and the offer will not be appropriate for every member."
He added enhanced transfer value exercises have often attracted negative publicity - especially where the incentive is offered as a cash sum.
"However, well-designed education programmes, including engaging an IFA to provide guidance to the members concerned, combined with an open member communication programme, can give employers the opportunity to put a win:win offer to certain categories of members. Just because the offer may be in the interests of the employer, does not mean that it will always be against the member's best financial interests," he concluded.
If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com
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