We at Allen & Overy are very pleased to have hosted the NAPF’s annual trustee conference today – themed “a brighter future”.
One discussion I had over lunch was with a trustee whose employer was just about to send information out to deferred members of the scheme on an enhanced transfer value (ETV) exercise. A huge amount of effort had obviously been put in by all parties (trustees, employer and advisers) into understanding and dealing with any risks involved. He was quite confident that the offer was going to be put to deferred members in a very balanced way, so that they could make the choice that was appropriate for them.
We were wondering together whether it was right for David Norgrove to suggest, as he did earlier today, that trustees should start from the presumption that such exercises and transfer are not in members’ interests. If a company is willing to encourage the transfer, the company gain is likely to be the members’ loss.
I’m not sure I do agree with this starting position. Is it not possible to get a win win situation? I think trustees and employers must act in partnership if at all possible and try and find that win win situation if one or other party wants to do something.
What about members who are younger and have been thinking about moving their benefits, and have just not got around to it? It may have been because a reduction has been applied to transfer values whilst the scheme is underfunded. Some employers are now willing to pay for schemes to pay a full transfer value, and a bit more besides, for the longer term gain in terms of risk reduction.
I agree – trustees should be cautious, model the possible outcomes for members and make sure that a balanced and open position is put to the members so that they can clearly understand the pros and cons. But I don’t think that they should start from a position of suspicion and doubt as to whether it could ever work in a member’s interests.
Any views from the floor?
Maria Stimpson is a partner at Allen & Overy LLP.
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Personally I agree with David. Can it ever be in a member’s best interests to transfer out of a defined benefit pension scheme (PPF issues aside)? Consolidating pensions pots is fine if it is DC to DC, but when would a member ever get an advantage from turning a guaranteed DB benefit into a DC pot just so they can transfer it into an uncertain annuity one day in the future?
Still, an impressively speedy blog on a topical issue – you’ll be Tweeting next!
The interesting thing will be to see whether any schemes considering entering an ETV process will now shy away from it on the strength of David’s comments. The ETV industry has gone into overtime recently trying to reassure people that it can be a safe option, when used correctly.
Could the apparently one sided view of ETVs by the regulator put the kibosh on future ETV plans?
I’m with David too on this one. I can appreciate his perspective that the company’s gain may well be the member’s loss, but think the more relevant issue here for trustees is their practical approach when faced with an enhanced transfer exercise. Trustees have a duty to act in members’ interests. The Regulator has previously said in guidance that trustees are to apply a high level of scrutiny to all inducement offers. What exactly are trustees to understand by “members’ interests” and “a high level of scrutiny”?
I think it’s extremely helpful that the Regulator has come out with an objective standard which trustees can use in assessing any transfer value exercise proposed by their sponsoring employer. If trustees start from the position that the exercise won’t be in members’ interests, concluding otherwise will have to involve scrutinising the proposals and considering members’ interests to get comfortable with the proposal.
I’ll declare an interest here as I’ve Project Managed on some of these exercises (from the pensions technical and compliance perspective – not the sales/advice element which was done by IFAs).
All good comments above and in essence I agree with the remarks from David Norgrove. Surely, it is prudent to start from the perspective that the DB pension provision is the ‘gold standard’ from which every other option needs to be carefuly measured against.
However, DB benefits are not guaranteed (and it’s amazing how often we still see the word ‘guaranteed’ used alongside the term ‘final salary’ when clearly benefits are ‘promised’).
The PPF may be adequate for pensioner members and those preserved members whose benefits fall within or close to the compensation limit, but is it such a good safety net to rely upon for higher earners with benefits above the limit?
As with any financial exercise making sure that members have access to balanced, relevant, and detailed information – delivered in an easy-to-understand format – should enable them to make an informed decision at that point in time.
And let’s not forget that people seldom have identical pensions and everyone’s personal circumstances differ. So, whilst it might be better for the majority to stay put, it would be wrong to deny the minority (whom it may benefit ) the option to take advantage of such an opportunity.
Mike Jones, Director, pension education website MyCompanyPension.co.uk