Loyal pension scheme members are being warned an exponential increase in the number of fellow members transferring out of any pension scheme can hit the value of their retirement nest egg.
Stephen Fallowell, a former member of the RBS Group Pension Fund trustee board, speaking on 20 June at the Association of Member Nominated Trustees conference in London, said schemes are facing cash-flow problems due to high volumes of transfers out of defined benefit (DB) schemes.
He said: “There are advantages in transfers, because it reduces liabilities. But what you need to be conscious of is that you don't want to be selling assets to make sure your cash flows requirements are going to be met.”
The main issue, Mr Fallowell explained, is that no one can predict the volume of pension transfers, so it is difficult to predict the cashflow the pension scheme will need.
Mr Fallowell argued that in such cases, the pension fund might need to reduce the transfer value of future requests, to make sure that it will have enough available funds.
Sanjay Gupta, an actuary at Willis Towers Watson, agreed this is a current issue for pension schemes.
He said: “Legislation allows you to apply a reduction to transfer values in certain circumstances.”
According to guidance from The Pensions Regulator (TPR), trustees are permitted to offer transfer values which are less than the initial cash equivalent under the best estimate method. One of the permitted reductions is to allow for the funding situation of the scheme.
However, trustees may only reduce the values for this reason after obtaining an assessment by the actuary of the funding of the scheme using the transfer value assumptions, and known as an insufficiency report.
Since the introduction of pension freedoms in 2015, the number of people transferring out of their final salary pensions has been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution schemes in order to access their cash.
According to data from the watchdog, £20.8bn was transferred out during 2017, more than double the volumes registered in the previous year.
Data from actuarial firm XPS Pensions Group (formally Xafinity) shows that the average DB transfer value stood at £234,000 at the end of May, a slight increase when compared with the previous month.
According to Andrew Macintyre, chartered financial planner at Alan Steel Asset Management, "you can not just assume that a high volume of transfers out of a scheme would automatically lead to future transfer values being 'less generous'".
He said: "Each scheme is different in terms of its funding and future liabilities. We actually see some schemes funding position improve, despite a high number of transfers out.
"I worry that this kind of argument will make members feel they need to get out of the scheme before they have to make a retirement decision, and I wouldn't be surprised if advisers use it as another means to unsettle members of these schemes to rush into unsuitable transfers."
maria.espadinha@ft.com
