The UK pensions regulator has written to 14 schemes’ trustees warning them not to be overgenerous in their cash equivalent transfer values (CETVs).
The Pensions Regulator (TPR) said it wanted to remind trustees of their responsibility toward those remaining in defined benefit (DB) schemes as well as those cashing out.
The letter emerged after Steve Webb, Royal London’s director of policy, applied to see it through a freedom of information request.
The TPR letter, which was sent in February, states: “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 CETVs 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 CETVs in light of their assessment of covenant strength.”
Among other reminders, the letter also says schemes should be electronically recording the details of each transfer, including financial advisers’ names.
Warning to members
In separate letter, published by the TPR and distributed to people requesting a transfer, the regulator tells members that a transfer is risky and unlikely to be in their best interests.
Lump sum pay-outs, with six figures not uncommon, have proved irresistible to many.
Despite the warning pension transfers have been lucrative for advisers. Cash-outs greater than £30,000 (€33,149, $38,641) require the input of an adviser regulated to provide transfers.
High volumes of cash equivalent transfer valuations
Commenting on the revelations Jon Greer, head of retirement policy at Quilter, said the actuary’s calculations and existing safeguards should be enough protection for consumers.
“The Pensions Regulator’s reminder… is a logical course of action given the volume of transfers from some schemes,” he said.
“Trustees should be monitoring and reviewing the appropriateness of the assumptions underlying the calculation of transfer values, and there is no suggestion that trustees aren’t taking this very seriously.”
Steven Cameron, pensions director at Aegon, agreed: “It is interesting that The Pensions Regulator has chosen to write to only 14 schemes, suggesting particular concerns for them, and that this has emerged only under a freedom of information request.
“It does highlight how difficult it is for trustees, with their scheme actuary’s help, to strike the right balance, as too cautious an approach might lead to those who transfer out receiving less than their fair share.
“This is made even more complex as changes in economic conditions and investment performance can produce quite sharp changes in scheme funding levels over relatively short periods of time.”
Getting the balance wrong
Webb told International Adviser he was “surprised” to see the warning on CETVs.
“I think the Pensions Regulator must be concerned that a few schemes are getting the balance wrong between those transferring out and those left behind,” he said.
A spokesperson for The Pensions Regulator said: “Transfers from DB schemes to DC (defined contribution) schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.
“Our primary concern is that DB scheme members requesting a CETV have all the information they need to make an informed decision about what is in their best interests. This includes understanding the fees that are charged under any new pension arrangement as these can make a significant difference to the value of the fund.
“As a result, we are working closely with the Financial Conduct Authority and The Pensions Advisory Service to provide an increased level of support to trustees and scheme members where there is uncertainty around the future of a DB pension scheme.
“This includes providing letters for trustees to send members alerting them to the risks of transferring and giving practical information.”
