personal finance

Pensions: don't cash out of defined benefits, warns regulator

Pension schemes are being warned they may be being too generous when offering cash lump sums to people considering transferring out of their gold-plated deals.

A letter sent by the Pensions Regulator to defined benefit (DB) pension schemes suggests that trustees think about whether they should cut the amounts on offer for workers leaving the pension scheme.

The letter has been sent to 14 schemes where the regulator is aware there has been a particular increase in transfer requests from members. The regulator is not calling on all schemes to consider cutting transfer values.

DB schemes are often described as gold-plated because they promise people a certain level of income when they retire, such as final salary pensions.

Such schemes give members the reassurance of knowing they will not run out of money in later life.

But in recent years people have been offered large cash sums in return for transferring away from their DB pension as schemes are finding it expensive to meet their pension promises.

The letter was obtained by Royal London following a freedom of information (FOI) request.

Giving a general indication of how much those who transfer out may potentially receive, Sir Steve Webb, director of policy at Royal London, told the Press Association that people are routinely offered 25 to 30 times their annual pension as a lump sum transfer value – but some schemes have been known to offer as much as 40 times.

This could mean that for a £10,000-per-year pension someone may find they are offered £250,000 to £300,000. But the amount on offer could be as high as £400,000.

The former pensions minister said a particular concern appears to be a situation where workers transferring out are offered a cash lump sum on relatively generous terms at a time when the pension scheme itself is in deficit or the employer is regarded as vulnerable.

If large numbers of members transfer out on generous terms there would be a risk that the funding position of the scheme could worsen and the risk of remaining members not getting their full pensions could increase.

Sir Steve said: “I would hope that well-run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out.

“But the regulator’s letter is a helpful reminder to all schemes that they need to be fair not only to those transferring out but also those left behind, especially where the scheme in question is in deficit.”

The letter tells schemes: “We would expect you to take advice from your scheme actuary about whether the basis on which CETVs (cash equivalent transfer values) 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.”

The letter says the regulator is aware that the level of transfer activity in the pensions industry has increased significantly in recent years.

It says: “Taking a CETV presents certain risks and we believe it is likely to be in the best financial interests of the majority of members to remain in their defined benefit (DB) scheme.”

Trustees are expected to explain that, in transferring away from their scheme, members would be giving up a guaranteed future pension income in return for income that is not guaranteed and will vary depending on how they manage it, the letter says.

A spokesman for the Pensions Regulator said: “Transfers from defined benefit schemes to defined contribution schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.”

“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.”


Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.