The Pensions Regulator (TPR) has warned the trustees of defined benefit (DB) schemes about potential risks to funds from allowing members to transfer out of their schemes to defined contribution (DC) schemes, suggesting that in some cases transfer valuations are too high
Royal London has obtained details of a letter sent to several large DB funds following a freedom of information request by the insurer. DB members are able to transfer benefits following the relaxing of the rules as a result of the government’s pension freedoms.
TPR said in its letter: ‘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 [transfers] 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 [transfers] in light of their assessment of covenant strength.’
TPR has already written to some dozen schemes this year, encouraging them to consider making reductions. A record £21bn left DB schemes in the year to March.
Sir Steve Webb, director of policy at Royal London, said people were routinely offered 25 to 30 times their annual pension as a lump sum transfer value, but also said it could be as much as 40 times.
He suggested payments of this size could pose a risk to the funds available for members who decided to stay with the DB scheme.
Webb 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.’
A TPR spokesman said: ‘Our primary concern is that DB scheme members requesting a cash equivalent transfer value 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.’
Report by Pat Sweet
