Defined BenefitNov 22 2016

Trustees under pressure to permit partial DB transfers

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Trustees under pressure to permit partial DB transfers

Product providers and platforms are campaigning to convince defined benefit (DB) scheme trustees to allow partial transfers to defined contribution (DC) schemes.

Since August, Aegon, AJ Bell, Hargreaves Lansdown and Royal London have suggested that members, employers and advisers could all benefit from the change.

Many DB transfer values have soared since the Bank of England cut the base rate to 0.25 per cent this summer, leading scheme members to consider taking advantage of what could be a short-term increase. 

“I’ve seen some numbers and it’s quite amazing,” said Kate Smith, head of pensions at Aegon. But she added that it would be risky for members to focus purely on current transfer values instead of retirement objectives. “If they’ve got very high transfer values that might be very tempting, but they really need to think of the downsides.”

A number of firms have experienced sharp rises in the number of DB to DC transfer enquiries since the advent of pension freedoms. A desire for more flexibility has been the key driver, but the recent issues of BHS and Tata Steel may have scared members by exposing DB schemes’ inadequacies.

“DB pension deficits are a major issue,” said Mike Morrison, head of platform technical at AJ Bell. “A greater number of partial transfers would help quantify the cost for employers because future liabilities would be lower, potentially enabling them to reduce or avoid deficits.”

Although partial transfers were first permitted as part of pension simplification in 2006, scheme trustees have been reluctant to entertain the idea. This has largely been due to a potential increase in the cost pressures already apparent within DB schemes.

“Trustees should be thinking more about what their members actually want. Many people want to keep the guarantee, but they also want the flexibility,” said Ms Smith, suggesting that trustees should collaborate with employers, members and advisers to analyse the merits on a case-by-case basis and move away from an “all-or-nothing” transfer process.

Ms Smith said the option should be available to deferred rather than active members, as doing otherwise would add “another layer of complexity”.

Although many schemes are said to lack the facilities to allow partial transfers, Mr Morrison said the problem is not insurmountable. He explained: “It might mean a rule amendment, as well as some extra administration and actuarial calculations, but this is done already for full pension transfers, so it should not be a show-stopper.”

craig.rickman@ft.com