The Pensions Regulator (TPR) should decide whether to cut pension transfer values when a scheme is underfunded, a pension expert has warned.
Adrian Boulding, director of retirement strategy at Dunstan Thomas, said this is a very difficult decision for trustees to make so should be made by the regulator.
FTAdviser reported today (29 August) that the watchdog had written to trustees of defined benefit (DB) troubled schemes reminding them to consider cutting the pension transfer values on offer to their members.
The regulator has been writing to schemes it deems troublesome due to recent events with their sponsoring employers, arguing it would expect such trustees to take advice from the scheme actuary about whether the basis on which cash equivalent transfer values (CETVs) are calculated "remains appropriate".
Scheme trustees are able to reduce the transfer values given to members if the pension fund is underfunded, and there isn't enough money for the scheme to pay for all the liabilities they have, Mr Boulding explained.
These professionals will need to request an insufficiency report from the scheme actuary, which quantifies the degree of the underfunding.
Mr Boulding told FTAdviser that trustees often struggle to make an active decision to slash transfer values for members.
He said: "If the report comes back and says that there is an underfunding of 10 per cent for example, the trustees have discretion to reduce the transfer values by that percentage."
Mr Boulding, who previously worked as a DB actuary, said he attended meetings where a decision to reduce values was discussed.
He said: "They feel that reducing transfer values is like an admission that they haven’t been managing the scheme properly."
Such decision could also be interpreted as a lack of trust in the employer to honour its promise, which Mr Boulding said could feel "very insulting" to an employer many trustees still work for.
Finally, trustees also felt they were "short changing their former colleagues", especially those that have a good reason to transfer, like emigrating to another country, he said.
Mr Boulding suggested a change in legislation – since trustees are legally responsible for transfer value cuts..
Every final salary scheme has to submit a triannual actuarial valuation to the watchdog, stating the current deficit (or surplus), and the recovery plan agreed with the sponsoring employer to fund the scheme.
If the regulator isn't happy with the state of the scheme funding, and there are concerns about the strength of the employer, TPR should then step in and make a decision about a potential transfer reduction, Mr Boulding argued.
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 Financial Conduct Authority, £20.8bn was transferred out during 2017, more than double the volumes registered in the previous year.