Bart Huby’s asking an existential question of DB pension scheme trustees – “what should your role be in supporting your members as they approach one of the most important decisions in their financial lives?”
Bart went to Christ’s Cambridge before joining LCP, so did John Milton – this is in the great tradition!
The key finding of the 9th edition of our quarterly analysis of our clients’ transfer value activity is that members of DB schemes are continuing to request quotations for, and take, transfer values at a hugely increased rate.
Compared with three years ago, before the advent of “pension freedoms” in April 2015, the schemes we administer are now paying out around 30 times the amount in transfers each quarter, with the average payment now over £600,000 – more than 2.5 times the average house price in the UK. Over 25% of transfer value quotations are being taken up by members, primarily by older members approaching retirement.
At the same time, a statement by the FCA in early October indicated that they had found problems in the advice and recommendations made by financial advisers in a large proportion of the cases of DB transfers which they had investigated. This was followed shortly by the FCA finalising guidance for firms on how to calculate redress for unsuitable DB pension transfers.
This bow wave of transfers, alongside clear evidence of inadequate advice being provided to some DB members, raises important questions for trustees of DB schemes that go to the core of their role. Is their primary responsibility simply to ensure their scheme provides members with their promised pension, or do they have a further duty to tell members about their options and provide information that helps their members make better retirement decisions?
William F Sharpe, Nobel Laureate in economics, memorably called the task of an individual planning the use of their savings in retirement the “nastiest, hardest problem in finance”. The option to take a DB transfer to a drawdown retirement account has presented members with an opportunity to free up their retirement finances, but at the same time has given this problem an extra, in some ways even nastier and harder, dimension. When deciding whether to transfer, members need to make a one-off irreversible decision about a complex and difficult to understand set of issues which could have a fundamental impact on their financial security for the rest of their lives.
Key questions trustees need to look at when considering how to support their members facing this problem include:
- Whether to provide information earlier (eg at age 55) than has historically been the norm, to give members more time to think through their options and plan the transition to retirement.
- How much information to provide to members, including whether to provide an indication or quotation of the transfer value as members approach retirement, and how to balance that information.
- Whether to give members extra options, for example to be able to take a partial transfer payment and retain part of their DB pension, or to reshape their pension in a way that better suits their personal circumstances.
- Whether to provide members with access to and/or pay for independent financial advice from a firm of advisors which has been selected by the trustees as being competent in this area.
At LCP we have increasingly in recent months been working with both trustees and scheme sponsors to help them to look at how they communicate with their members as they approach retirement, and what options and support they provide to members when faced with making decisions on their retirement benefits.
There are unfortunately no easy answers, and certainly no one-size-fits all solution. What is right for a particular scheme will depend on many factors, including the size and profile of the scheme’s membership and benefits, and the level of understanding and financial sophistication of the members themselves. And also, crucially, on the trustees’ views on what their role should be in this complex arena. However, what is clear is that there is a steady trend of providing more information, sooner, in a more balanced way, and considering offering members access to specialist financial advice.
This article first appeared on LCP’s blog and is published with their kind permission
The Pension PlayPen lunch on Monday December 4th will be discussing Bart’s question. Counting House, Cornhill 12 for 12.30 – all welcome