Reputational risk and liability top employers concerns over freedoms

UK employers are worried about their reputational risk and potential liability if employees make poor decisions about their DB pensions, according to a survey of large UK employers published today.

The research shows on average employers expect a third of DB pension scheme members to transfer some or all of their DB benefits over to DC. This would lead to flows of around £10bn per annum from DB to DC says Hymans Robertson, who commissioned the research.

Almost half are worried about being held liable for failing to prevent employees from making decisions leading to poor personal outcomes through DB-DC transfers, while two thirds believe a major risk for employees is having to work longer due to rapidly spending their retirement savings

The research found 57 per cent expect workforce management issues as a consequence, due to individuals working significantly beyond retirement age. It found 56 per cent believe employers face reputational risks if employees make poor decisions which they regret in later life, while 52 per cent believe a significant risk of DB to DC transfers relates to the investment and liability impact transfers could have on their pension scheme.

Hymans Robertson partner and head of corporate DB Jon Hatchett says: “The last time we had a rush of transfers out of DB schemes in the late 80s it ended in tears with many advisers getting sued.  Over one million people are estimated to have been led to make the wrong choice.  It’s vital that we learn from the error of the past.  Employers providing DB schemes and the trustees overseeing them must ensure scheme members have good support to make choices that are right for them. Trustees owe a duty of care to members, but it is also just the right thing to do.

“There are two reasons why employers should be paying close attention to what happens from April. First, if employees give up their DB benefits for the wrong reasons and find they are in a dire financial situation later in life, there is always a risk this could come back to bite their former employer.

“Second, if significant numbers of members transfer out then the financial mechanics of the scheme will be very different.  This can have major implications on the pension costs employers have to bear, and the residual size of the scheme on their balance sheet.  This flow of money from schemes direct to members will also affect the pricing of capital market assets pension schemes hold due to the sheer amount of money involved.  

“DB to DC transfers will appeal to a broad range of people. For some, making the full switch to DC could make sense on a purely economic basis, particularly if they don’t have a spouse, are in poor health or have another, better source of retirement income.  For others, it will be the simple emotional appeal of flexibility that will trump financial considerations.  Whether it is the hope of outsized returns in the buy-to-let market, or taking the grandchildren to Florida, being able to access money more rapidly will be a strong motivation to many.

“Individuals need clear information on the risks that go alongside the Government’s reforms. Once you transfer out, you can’t go back. Once you’ve spent the money, it’s gone.”