Employers should encourage trustees to reconsider their approach to defined benefit (DB) pension transfer payments in response to recent regulatory changes, says Mercer. In light of the changes a new climate exists around transfers, says the consultancy, and companies should be supporting trustees in offering more generous transfer payments than may have been available in the past.
The comments follow the Government’s announcement that transfers from private sector DB schemes and funded public sector DB schemes into defined contribution (DC) schemes will be allowed to continue. From April 2015, DC members will no longer have to buy annuities and can use their retirement funds however they wish, including taking them all as cash (subject to tax).
“Many DB members are likely to want to access that flexibility but, under current rules, they can only do so by taking a transfer payment to DC,” says Matthew Demwell, Partner at Mercer. “These transfers are likely to be prompted by employers offering Enhanced Transfer Values (ETVs) or by facilitating transfer from DB to DC at the point of retirement.”
“Most pension schemes pay transfer values which reflect the cost to the scheme of providing the member’s benefit, rather than necessarily reflecting the cost to the individual. Therefore, financial advisers are usually unable to recommend that members - especially those further from retirement - accept them. If trustees offered higher transfer values, it seems likely that more members would take them.”
According to Mercer, if more members take transfer values scheme liabilities would fall, which would help the employer’s risk exposure. It’s also possible that schemes could end up better funded relative to their longer term funding objectives, which are likely to be more onerous than current funding targets. Take-up of transfer payments would be even higher where the employer is willing to top them up to an enhanced level.
“It’s clear that having the flexibility to take DB to DC transfers, if pitched correctly, can really benefit members, the employer and trustees,” continued Mr Demwell. “Some members can be better off with benefits that more closely reflect their circumstances; employers can reduce their DB exposure and long-term cost while trustees have fewer pensions to administer and less reliance on the sponsor’s covenant. However, to turn the trickle into a stream and help with the management of pension risk, there will be cases where the transfer values offered to members will need to be increased.”
Mercer has welcomed the decision to permit the continuation of DB to DC transfers since it provides scheme members with choice in how they can spend or invest the value of their pension as well as helping employers and trustees manage the financial risk of their pension schemes. Mercer agrees with the government’s expectation that most DB to DC transfers will occur at retirement although transfer payments that are suitably enhanced will also be attractive to some members below retirement age. The government has also said that all members - other than those with pension savings of less than £30,000 who will be exempt - will be required to pay for independent financial advice before transferring out of a scheme which should act as a valuable safeguard for members.
About Mercer
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in more than 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.
