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Enhanced Transfers & Aviator Shades

You will probably have read the Chair of the Pensions Regulator's comments concerning his dim view of pension transfer incentive exercises (where sponsoring employers provide an enhancement to standard transfer values).

 If you have the time you can read the full text of David Norgrove's speech here

 Perhaps you actually attended the NAPF Trustee Conference and would like a souvenir of the experience, or maybe you were there and got locked in the toilets and missed out completely.   

 If you'd like to pretend that you were in charge of tPR you could deliver the speech yourself to an appreciative audience.  Helpfully, the pauses in the speech are clearly marked out so you will know when to breathe.  I'm planning to deliver it to my in-laws following Christmas dinner.  I'll let you know how it goes.

 However, if you're pressed for time (and are currently thinking of stopping reading about now) the highlights of the speech were Mr Norgrove's statement that "Trustees should start from the presumption that such exercises and transfers are not in member interests."   He also added that "There may be individual circumstances that lead some individual members to make a transfer decision based on sound rationale and advice - but in general it is unlikely to be in members' interest to transfer out of a DB scheme."

 TPR has said it has received reports of worrying tactics being used during enhanced transfer exercises, including:

  • execessive pressure to make a decision - with constant e-mails, phone call and home visits
  • the provision of misinformation, including a strong suggestion that the future of the scheme is at best uncertain
  • putting excessive time pressure on members to make a decision

Obviously, nobody condones transfer schemes where the incentive may be 'sending the boys around' or applying a 'chinese burn' so many seemed a bit miffed that tPR's message on the subject seemed to link enhanced transfer value exercises with shady practices.

  As you would imagine, many commentators in the pensions industry have responded by saying that enhanced transfer exercises are appropriate and may be appreciated by scheme members if carried out correctly. 

  A few thoughts crossed my mind whilst reading Mr Norgrove's comments and the responses to it:

  1. If trustees should presume that transfer values are not in a member's interest, what should they presume about standard (unenhanced) transfer value requests?  
  2. The Financial Assistance Scheme was partly a Government response to claims that it encouraged people to join DB schemes by overstating the cast-iron guarantees that they provided.  Could tPR come under fire in the future if an overtly negative view discouraged members from taking an enhanced transfer value from a scheme whose employer became insolvent at some future point
  3. No one would dispute that it would be wrong to provide misinformation about the future of the scheme i.e. suggesting that benefits may not be paid in full.  However, some of the information that Trustees are required to provide to members, such as Summary Funding Statements can cause anguish in themselves and lead members to make their own conclusions about the future of a scheme.  Telling members about what would happen in the event of wind-up and the operation of the Pension Protection Fund can (and does) cause some members to question the future of the scheme, especially if the funding level is poor. How much reassurance can a Trustee give to someone who is 10 or 20 years away from retirement.
  4. A few years ago, when pretty much everyone in pensions agreed that most people should contract back into SERPS, some well known figures said that they would remain contracted-out as they preferred the certainty of money in their personal pensions to a government benefit that could have changed beyond recognition by the time they retired.  Could you really tell somebody whose scheme benefits were in excess of the PPF cap that an enhanced transfer value would not be in their interest?

On this final point, it is interesting to note that the Telegraph recently reported that a number of pilots at British Airways, who are forecast to get quite high pensions, are transferring their benefits to other pension arrangements.

  One could imagine that a pilot set to receive a pension of, say, £75,000 per annum would not be greatly impressed to receive a pension of under £30,000 in which only the post 1997 benefits get any increases in retirement should the scheme fall into the PPF.  Mind you, it would be hard to read their emotions if they were wearing aviator sunglasses.

  British Airways pension difficulties are well known and I doubt that Willie Walsh would get a warm reception for suggesting an ETV exercise in the near future. 

  TPR may be thinking that if a company can fund an ETV  then it can fund full pension benefits as they fall due.  That may be the case in the short to medium term but you would be quite optimistic to argue that it would always be the case. 

First published: 21.12.2009

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