The government wants to crack down on incentivised transfer exercises in workplace pensions, but some experts oppose a ban, says Nicola Sullivan
Pensions minister Steve Webb has urged a crackdown on the use of enhanced transfer values (ETVs) when employees move from defined benefit (DB) to defined contribution (DC) pension schemes.
ETVs are a popular way of removing risk from DB pension schemes and involve an employer offering staff cash lump sums or immediate increases to their pension pots to transfer out of a DB plan. Webb said it was urgent to root out bad practice surrounding incentivised transfers such as ETVs.
“The industry cannot go on offering superficially attractive deals to people that ultimately leave them badly out of pocket,” he said. “I am very concerned people are making the wrong choices about their pensions and are missing out on substantial amounts of retirement cash.”
The Department for Work and Pensions is particularly concerned about staff being offered cash lump sums at times of the year when they may require extra money, such as just before Christmas, in exchange for transferring into a less generous DC pension.
It also warns that pension increase exercises (Pies), whereby pensioners are offered a cash sum or a higher current pension in return for giving up future non-statutory pension increases, could reduce their purchasing power by 20-25% after 20 years.
Unlike ETVs, Pies are not subject to robust regulation around advice, so employers are not under the same pressure to communicate them effectively to staff.
Philip Smith, head of DC at Buck Consultants, said: “On an ETV exercise, there is a need to provide regulated financial advice to each member of the scheme in receipt of the offer.
“Pies are a little bit different. Because there is no sale of a product, the advice process is not regulated. You would expect a responsible employer to engage an authorised adviser, whether an IFA [independent financial adviser] or some other form of advice. But I have heard of examples of employers doing things like providing telephone helplines and information, rather than providing people with concrete written advice.”
But some industry experts are keen to reiterate that incentivised transfer exercises can be the best option for some staff. Malcolm McLean, a consultant at Barnett Waddingham, said: “I think it would be a pity if Webb banned these transfers. That is not to say I feel the majority of individuals would necessarily benefit from them, but there are definitely some who would and it would be wrong to ban it on that basis. I am not even sure if, legally, Webb has the power to do this. It is the employer’s decision whether to do it.”
For example, if a pension scheme member is in poor health, a transfer might allow him or her to obtain an enhanced or impaired-life annuity with a bigger retirement income than a salary-related scheme would provide.
Such arrangements would also allow the employee to take tax-free cash and start drawing a pension or enter into an income drawdown arrangement from age 55, which is lower than a scheme’s usual pension age. Smith thinks ETVs might also suit a single person with a high-risk attitude to investment. “It all depends how much money the employer is prepared to put behind it,” he said.
McLean said it was important to give people flexibility around their pension savings and that incentivised transfer exercises could be used to provide early access to pension schemes, an idea that was previously mooted by Webb.
He explained: “The more flexibility that people can get with their pensions the better, as long as they are not getting ripped off and are getting proper communication.”
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