June 6, 2011

Enhanced Transfer Values caught in a Webb

Filed under: Blog — Grove @ 9:12 am

I have to confess to complete amazement at recent comments made by our Pensions Minister, Steve Webb. Here’s what he’s quoted as having said;

“We urgently need to make sure we root bad practice out of the market. The industry cannot go on offering superficially attractive deals to people that ultimately leave them badly out of pocket”

“I am very concerned that people are making the wrong choices about their pensions and are missing out on substantial amounts of retirement cash.â€

The comments were directed at Enhanced Transfer Value (ETV) exercises. This is where an employer offers, for a defined period of time, an addition to the normal transfer value for those who choose to transfer out of their Defined Benefit scheme.

The extra amount is clearly an incentive to transfer as scheme liabilities and therefore risks to the employers’ business are reduced. But is that wrong?

Transfer values are calculated by professional actuaries. They are calculated to represent the best estimate of the present day value of the benefit earned. If an enhancement is being added, then the member is being offered MORE than the best estimate of the present value of their benefits.

The duty to offer transfer values was imposed on pension schemes in the 1985 Social Security Act. At around the same time, employers were prohibited from compulsorily enrolling new members into their schemes. The subsequent increases in average membership ages undoubtedly contributed to the demise of Defined Benefit pension provision. The purpose of the legislation was to ‘break the chains’ (you may remember the advertisement?) of company pension provision in recognition of the right of the individual to exercise personal choice.

So why shouldn’t members have the right to transfer on favorable terms?

There is a significant change to risk exposure when a transfer value is taken from a Defined Benefit scheme to an individual pension savings policy and personal circumstances will need to be considered. It is essential therefore that members’ receive independent financial advice to ensure that they understand the risks. The Pensions Regulator has already ensured that Trustees are well aware of their duty to point this out to their members.

So given that members are being offered more than they are entitled to, and independent financial advice will be provided to help them to decide;

  • Why is the incentive superficial?
  • Where is the bad practice?
  • How does he know that members will be out of pocket?
  • How much cash are they missing out on?

Members are being offered a bird in the hand where two in the bush is only a distant possibility.

Perhaps Mr Webb refers to specific examples of malpractice. If there are, the Pensions Regulator will no doubt be investigating. But he didn’t say that was the case. His remarks were general in nature, casting doubt about ETV’s per se.

One of the things I keep hearing is that the general public has lost faith in pension providers. In view of the governments’ ambition to collaborate with employers and the pensions industry to ensure the success of its auto-enrolment legislation, I’m bound to observe that such generalisations, pointing to widespread but unproven malpractice are, at the very least, unhelpful.

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