Prudential’s Martyn Phillips assesses the vital role that corporate advisers play in delivering a successful ETV exercise.
As the Pensions Regulator re-iterated in December, incentivising members to ‘give up’ their Defined Benefit arrangement in exchange for a DC alternative is not a straight forward process. Equally, such a move will simply not be the most appropriate path for many individual members. However, ETVs are about offering members a choice. And success rests absolutely on how well members are engaged, educated, supported and ultimately advised, to ensure they are able to make such a vital decision based on a well informed choice. We fully understand the important role that corporate advisers have in making an ETV exercise a success and in the best interests of all parties. That’s why at the beginning of 2009 Prudential conducted a survey with a number of corporate advisers participating in the Enhanced Transfer Value Market.
The survey preceded Prudential’s ETV Forum in March 2009, bringing together the views of Employee Benefit Consultants and Corporate IFAs. One year on, we can reflect on how those expectations of last year compared with the reality of the market – and look ahead to how 2010 may pan out.
Many felt that 2009 would be a significant year for ETV business, with 65% of corporate advisers believing the depressed markets would make ETVs more viable in terms of ‘buying into DC at time of extremely depressed markets’. 44% expected more than 5 FTSE100 companies to transact an ETV in 2009, while 82% felt that more than 5 FTSE250 companies would transact. The reality wasn’t quite so rosy, with almost no deals of this size and nature announced.
The key concerns highlighted for FTSE100 companies that may have held them back were reputational risk and a lack of available capital for the sponsor to fund such exercises. The good news is that a lot of work has gone into developing robust models that align to regulatory guidance on ETVs – and the involvement of reputable adviser firms and product providers specialising in ETV business should help alleviate concerns of reputational risk. Therefore, when financial markets improve to appropriate levels, we expect to see a significant rise in ETV activity initiated by large UK corporates.
One message that rings loud and clear from the experiences of the last year is that large ETV deals require a fully bespoke solution, with all parties being fully aligned at an early stage. The delivery model needs to be right from start to end, to ensure the member outcome is appropriate. And that requires teamwork.
Another interesting factor from the survey was expectations of member take-up rate. For FTSE 100 schemes, just 39% of corporate advisers anticipated member take-up rates would exceed 25% per scheme, where there was no cash incentive. However, 83% of advisers felt member take-up rates would exceed 25% where such deals do include an offer of a cash incentive However, the key here is not just what is being offered, but how it’s being offered. The Pensions Regulator has highlighted some cases where members are under pressure to sign-up on a first come first served basis, due to limited availability of the offer. This is just one of a series of examples of worrying tactics highlighted by tPR and Prudential would not entertain such approaches as we feel the offer needs to be fair to all members and that no undue pressure should be placed on individuals to make such a vital decision on their future financial well-being.
Regardless of how generous any ETV offer may or may not be, advice is probably the most important factor of any ETV exercise. To ensure members are both well informed and appropriately prepared we firmly believe that any advice relating to the relevance of an ETV should be fully independent, with the employer covering the fees. This belief was backed up by the views of corporate advisers.
89% expected that at least half of any ETV deals involving FTSE100 companies would include provision of company paid advice for members. While not a major surprise, this view clearly represents a significant factor in ensuring any offer to plan members is both credible and appropriate to the individual.
Furthermore, the advice needs to take into account a number of factors – such as each member’s personal attitude to risk, the term to retirement, the significance of the deferred pension benefit in their overall retirement plans, their current financial circumstances, the generosity of the offer etc – to ensure the member makes an informed choice. As a consequence, the appetite for direct offer business has all but disappeared in this market, with almost all ETV business now conducted on an advised basis.
In our view, this is a positive step and forms a key element of the robust model that we assess before determining whether or not Prudential should participate in any such exercise.