The UK’s Pensions Regulator (TPR) has written to trustee boards of defined benefit (DB) schemes urging them to consider reducing the transfer values offered to members when considering exiting the scheme.
In a letter sent to a number of large DB funds – obtained by financial services group Royal London under the UK’s Freedom of Information act – TPR advised trustees to consult their actuaries regarding the effects of transfers out of their schemes.
DB scheme members in the UK are permitted to transfer their benefits to a defined contribution (DC) scheme. This option has increased in popularity in recent years following a relaxation of the UK’s rules regarding DC retirement options.
TPR said in its letter: “In light of recent events concerning your scheme’s sponsor(s), we would expect you to take advice from your scheme actuary about whether the basis on which [transfers] are calculated remains appropriate.
“We would also expect you to consider whether a new insufficiency report should be commissioned from the actuary. This would allow you to judge whether a reduction or further reduction should be applied to [transfers] in light of their assessment of covenant strength.”
Royal London warned that a scheme granting generous transfer values to members while running a deficit could worsen its funding position, even though it would be reducing its liabilities.
Sir Steve Webb, director of policy at Royal London and a former UK pensions minister, said: “I would hope that well run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out.
“But the regulator’s letter is a helpful reminder to all schemes that they need to be fair not only to those transferring out but also those left behind, especially where the scheme in question is in deficit.”
The regulator said it had “sent letters on 12 occasions to trustees regarding transfer activity” in the year to 26 July.
Other recommendations
TPR also recommended that schemes review their member communications, and outlined a number of issues for them to highlight to members.
These included:
- An explanation of the risks of transferring out of a DB scheme, including an emphasis on the loss of a retirement income guarantee;
- The legal requirement for those transferring out more then £30,000 (€33,300) to seek professional advice from a qualified, authorised adviser;
- Information about the Pensions Advisory Service, a government-funded organisation that provides free guidance on pension issues; and
- The risk of pension fraud.
Trustees should also seek to improve their record-keeping to monitor transfer requests, and send the regulator monthly updates about transfer activity, TPR said.
As DB to DC scheme transfers have increased, so has the number of reported pension scams – predominantly involving individuals being persuaded to transfer their savings into unauthorised investment funds. During the recent high-profile restructuring of the British Steel Pension Scheme, a number of people were targeted by unauthorised ‘advisers’ who directed them to expensive, inappropriate investments.
UK regulators, including TPR and the Financial Conduct Authority, have reiterated that exiting a DB scheme – and forfeiting the guaranteed income stream it provides to retirees – is unlikely to be in the best interests of most members.
The regulators have also joined forces to launch a multimedia advertising campaign to raise awareness of pension fraud.
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