Actuaries urged to stop ‘pension scandal’
The flexibility to allow members to move from defined benefit to defined contribution schemes could give rise to the next pensions mis-selling scandal because of inconsistent valuations, it is claimed.
While all DB scheme members must get advice from a qualified pensions adviser before they are allowed to take their pension cash, there are fears that letters being sent out by some pension schemes are overvaluing the transfer value of a member’s DB pension, which could encourage members to transfer their money out.
At a Financial Reporting Council event to mark a decade since the Morris Review examined the role of actuaries, one actuary posed a question to the board over whether the lack of any standard for valuing transfers could lead to a mis-selling scandal.
Stephen Haddrill, chief executive of the FRC, acknowledged the difficulty of providing valuations in an ever-changing economic environment, and said: “Pension reform in the UK has changed the pension landscape. There will be challenges for actuaries advising DB schemes with the possibility of a significant number of members wanting to transfer to take advantage of the new pension freedoms.”
John Instance, director of actuarial policy for the FRC, said actuarial work concerning advice given to trustees on the assumptions and methods to be used in determining transfer values was subject to the FRC’s technical actuarial standards.
However, there is no one definitive standard, to which all must adhere. He added: “The regulations and the actuarial standards do allow for the exercise of professional judgement permitting the terms offered to take account of the individual circumstances of the pension scheme. It is therefore possible for transfer values to vary between schemes.”
The level of interest rates is one important factor in the determination. “The current low level of interest rates is likely to be one reason why values appeared high”, he added.
In March, the Institute of Actuaries wrote to members, stating: “Scheme actuaries who advise trustees on setting transfer value calculation bases should ensure the client reviews those regularly. Transfer bases have a direct effect not only on the benefits received by the individual but also on the security of benefits remaining in DB schemes.
“If an increase in the number and value of transfers materialises, the impact on DB schemes could be significant.”
The decisions made by trustees are subject to regulation.
Adviser view
Simon Torry, chartered financial planner at SRC Wealth Management in Essex, said: “One of our clients in a defined benefit scheme that would be paying out an income of around £32,000 was quoted a cash transfer value of over £600,000.
“Getting a letter with that kind of value attributed to a pension is a bit concerning, but obviously there are checklists in place that means someone coming out of a DB scheme takes advice.
“We are a bit concerned that some values may be arbitrary. How are they being costed?”
