Transfer trauma

Transfers from DB schemes are causing headaches in Whitehall. John Greenwood reports

Pensions minister Steve Webb’s recent attempt to put the mockers on cash equivalent transfer exercises highlights the uneasy relationship government has with schemes, employers and members.

Webb’s intervention was designed to underline the fact that many people offered advice ignore it when the pound notes are waved in front of their face, accepting reduced benefits tomorrow in return for immediate gratification today.

His pronouncement also goes some way to regaining the moral high ground on occupational schemes in light of the huge favour the DWP has done employers at the expense of members through the switch from RPI to CPI.

The DWP says it is considering the discussions that took place at the summit and will continue to explore options before agreeing on next steps. Whether this statement is a serious threat of action will determine whether it will be in the interests of schemes thinking of entering into programmes more quickly to do so while the door remains open.

John Broome Saunders, actuarial director at Broadstone, says: “The Regulator has been huffing and puffing about this for some time, but the intervention of policy-makers is a significant change of tone. Webb may have called a few key players into the headmaster’s study for a stiff talking to, but the real question is whether this will be followed by Government action.

The Regulator has been huffing and puffing about this for some time, but the intervention of policy-makers is a significant change of tone

“Regulatory changes to make these exercises harder – or impossible – now begins to look like a real possibility and this could even outlaw “fair” or “generous” offers to members. DB scheme sponsors who want to pursue these projects should act quickly in case the window of opportunity closes. They should also follow best practice to avoid problems with the Regulator coming back to them at a later date. The ’next mis-selling scandal’ soubriquet is now becoming difficult to shake off.”

While it is easy to say individuals do not know what is good for them, the issues may not be as straightforward as the minister thinks, as any scheme member facing eviction from their home as a result of credit and store card debts would attest.

Tim Whiting, head of enhanced transfers at Alexander Forbes Financial Services says: “Despite the fact that our position continues to cost us revenue, we have held an anti-cash stance when other advisers – both corporate and individual – see cash as a way of improving take up.”
“But I concede that there is certainly a place for cash enhancements. A typical example here will be the significant number of members with high credit card or store card debts that they are struggling to repay.”

The problem of cash incentives echoes the recent industry discussion on early access to pension, an idea that has been shelved by the Treasury. But it also touches on concerns at what mass withdrawals from DB schemes, permissible under current rules, could actually lead to.

While CETV exercises are done with a view to reducing liabilities, members remain free to themselves solicit a transfer into a DC plan. That poses risks to schemes’ short-term cash flow, and the potential for it to be used is increased by the new rules around flexible drawdown.

Last December the Government stopped short of an across the board ban on transfers out of DB. Industry figures had warned of a short-term rush that would create a cash crisis for schemes. While that threat has now receded, flexible drawdown increases the attractiveness of transfers for high earners.

For income-rich, cash-poor DB members, the ability to take big chunks of money out of a final salary pot could prove attractive. And for those with impaired lives, better income could be achieved outside the scheme.

“If I have been on ill-health early retirement for years in the civil service pension scheme, I am still allowed to take a transfer before my scheme retirement date,” says Andy Cheseldine, consultant at LCP. “I can then take a transfer and go and get an enhanced annuity on the open market. For local government schemes that could be problematic.”

The precarious state of schemes was highlighted last month with the news that the Warwickshire County Council pension fund has had to take a £5m loan for six months to fill a shortfall in its cashflow. The scheme has blamed job cuts and early retirement programmes for the shortfall. This may be just a drop in the ocean for a scheme with assets of over £1bn, but it would only take a couple of senior executives to request transfers to create a similar shortfall, highlighting the risks to schemes if transfers become a trend.