1 October 2019
LCP have recently published a joint policy paper with Sir Steve Webb of Royal London, calling on DB pension schemes to consider giving their members a “partial transfer” option. Steve introduced the paper in his LCP guest blog on 1 October, and on the same day Steve and I presented our findings and recommendations to over 100 guests at our Breakfast Briefing.
But whilst partial transfers may be attractive in theory, what about the legal and administrative complexities of introducing them?
The advantages of a partial transfer from the perspective of members are clear. Whilst they won’t be right for everyone, they really can give some members the best of both worlds: a secure income from a DB pension scheme, with a flexible tax efficient asset in addition. Royal London’s research shows that financial advisers agree with this and strongly support more schemes offering partial transfers. In turn:
- some members taking partial transfers rather than full transfers would mitigate some of the considerable risks that are currently involved in pension transfers for all parties; and
- the right members taking partial transfers rather than no transfer would offer those members a retirement income pattern and use of their pension asset that better suits their circumstances.
Therefore, we and Royal London are of the view that offering partial transfers, supported by appropriate communications and advice, can be a “win-win” for the member, the scheme, the sponsoring employer and financial advisers.
However, LCP’s own research is that only 22% of schemes currently offer partial transfers. Whilst this is up from the 15% we reported 2 years ago, it still means that nearly 80% of members currently do not have the opportunity to explore this flexible option. So what’s holding schemes back?
First, there is no legal obligation to offer partial transfers. With constrained resources, and partial transfers requiring additional costs and co-ordination from a number of different professional advisers, some trustees are reticent to do more than they are required to do. But if it reduces risk for all parties, we think it's worth considering?
Second, there is a general nervousness amongst some trustees about transfers. Anecdotally we sometimes experience trustees deciding against making any changes to transfer options or transfer communications out of concern that this may somehow be seen as an encouragement to transfer. But if some members are already taking full transfers in any event, new options and communications that mitigate transfer risks should be a good thing?
Third, the development of a partial transfer policy is not trivial and does take some thought, and specialist advice must be obtained. There are indeed a number of technical and administrative points to work through, but in our experience the hurdles are invariably surmountable. We offer practical solutions and examples in our paper and point out that in some cases certain features of the scheme mean that very simple solutions can be found, as in the case study of the Ford UK Pension Scheme that features in our paper.
Ultimately, pension schemes exist to provide benefits for members. Since the advent of “pension freedoms” in 2015, members have had considerably more choice about how to use their pension benefits, and the “all or nothing” transfer has proven attractive to around 500,000 people! Many commentators, including the FCA, are of the view that a significant number of these members may be making inappropriate decisions. In this context, giving members a partial transfer option can generally be expected to result in better member outcomes and a reduction in risk for all concerned.
I therefore hope that our paper encourages many more schemes, employers and advisers to work together to introduce a partial transfer option for many more members.