Pensions pay-outs deemed too generous
4th September 2018
By Lyndsey Hall
The Pensions Regulator has deemed pension schemes “too generous” when offering lump sums to people cashing out “defined benefit” retirement schemes.
Fourteen schemes have been encouraged to consider making reductions, amid concerns that overly generous pay-outs could damage the remaining funds. In the year to March, a record £21 billion flowed out of these schemes.
Defined benefit schemes guarantee a certain level of income on retirement, such as final salary pensions, and for this reason they’re often referred to as “gold-plated”. However, in recent years firms have been offering people large cash sums to transfer out, as it gets more expensive to cover their obligations.
Sir Steve Webb, director of policy at Royal London, who obtained the letter following a freedom of information request, said people had been routinely offered twenty five to thirty times their annual pension as a lump sum transfer value. He said some were even offered as much as forty times their annual pension. This means for a £10,000 per year pension, someone could be offered as much as £250,000 to £400,000.
The letter, which suggests trustees consider cutting the amounts on offer for workers leaving the pension scheme, was sent to fourteen schemes where the regulator is aware there has been a marked increase in transfer requests from members.
Former pensions minister, Webb, said a particular concern was workers transferring out and being offered a relatively generous cash lump sum when the pension scheme itself is in deficit or the employer is regarded as vulnerable. If large numbers of members were to transfer out on generous terms there would be a risk that the funding position of the scheme could worsen, risking the remaining members not getting their full pensions.
“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.”
The letter states: “We would expect you to take advice from your scheme actuary about whether the basis on which CETVs (cash equivalent transfer values) 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 CETVs in light of their assessment of covenant strength.”
The letter highlights that the regulator is aware that the level of transfer activity in the pensions industry has increased significantly in recent years, and that the regulator believes it is in “the best financial interests of the majority of members to remain in their defined benefit (DB) scheme”.
Trustees are expected to explain that, in transferring away from their scheme, members would be giving up a guaranteed future pension income in return for income that is not guaranteed and will vary depending on how they manage it, the letter states.
A spokesperson for the Pensions Regulator said, “Transfers from defined benefit schemes to defined contribution schemes are unlikely to be in the best interest of most members, although there are certain circumstances where they may be appropriate.
“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.”
If you’d like some impartial advice on your own pension arrangements, please get in touch with our Chartered Financial Planner, Dan Eatch.