Advisers have reported a spike in “incentive exercises” undertaken by companies looking to offload their defined benefit (DB) liabilities.
Tiziana Perrella, head of buyout at JLT Employee Benefits, told Financial Adviser there had been a marked increase in the number of companies offering “pension increase exchanges” (PIEs), whereby members give up the right to annual benefit increases in exchange for a greater initial income.
Allan Maxwell, director of Corporate Benefits Consulting, said his firm had seen a surge in demand for enhanced transfer values (ETVs), which incentivise members to transfer out of the scheme altogether by offering them a larger lump sum than is required.
Both Ms Perrella and Mr Maxwell said companies were undertaking these exercises to reduce liabilities in an effort to prepare for bulk annuity buyouts.
The pair said all firms would eventually seek to offload their entire scheme onto an insurance company.
However, the increased interest in incentive exercises has raised questions over whether members are being adequately protected from employers keen to offload as many members as possible.
The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) confirmed that regulatory responsibility for this area was split between them.
TPR has responsibility for the pension scheme side, while the FCA regulates the advice provided to members wanting to transfer out.
Mr Maxwell, whose firm is paid by sponsoring employers to provide the advice to members considering transferring out, said there was no pressure to advise in favour of a transfer. “We’re getting paid no matter what happens, whether we transfer people out or not,” he said.
Nevertheless, he added that an ETV exercise had, at the top-end of take-up, resulted in 60 to 70 per cent of members transferring out of the scheme, and even when take-up was low, it was still at 20 to 30 per cent.
Mr Maxwell put the spike in interest in ETVs down to the introduction of pension freedoms – which make transferring out considerably more attractive because it means they can draw down all their cash in one go – and improved economic conditions after the 2008 financial crisis.
He said ETVs were popular with companies with spare cash and a deficit that was not overly large. He added: “If you’ve got no money and a huge deficit, it’s not going to happen.”
Ms Perrella said her corporate clients in recent years had been favouring pension increase exchanges over ETVs, partly because plummeting gilt yields pushed transfer values to historic highs.
However, while any scheme could, in theory, undertake an ETV, she pointed out that only schemes whose annual benefit increases were above the legal minimum could undertake PIEs.
Ms Perrella said that members were required to take advice on PIEs, and were always presented with details such as the “break-even point”.
However, she conceded that PIEs worked in the opposite way to an annuity, in that the longer you lived, the worse of a deal you got.