This year saw the introduction of sweeping reforms that have dramatically changed the pension landscape. With many changes coming into effect in April 2015, the next few months will be a crucial cogitation period for the industry as it makes sense of the reforms and adapts to the new environment.
Margaret Snowdon OBE, Director, and Hugh Nolan, Chief Actuary, discussed views from the industry, employers, trustees and government organisations. Below is a summary of the key points discussed on the day, if you need any further clarification then please do not hesitate to contact Margaret or Hugh, their contact details are at the end of this document.
TRUSTEE DILEMMA
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Trustees are sleepwalking into a range of issues by not being prepared for a significant amount of members transferring out of schemes in one go
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By not taking decisions now, or planning for significant requests, trustees run the risk of millions of pounds leaving schemes at the same time, or not being in a position to settle valid requests from members
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Current factors may not be fit for purpose; members who transfer out now could get 10-15% (artificial) higher value due to gilt yields, which have dropped by 0.8%
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A big issue could be those who take transfer values early, get larger values than fair to other members who do not. It is a risk that early higher transfers values could jeopardise the security of the scheme and if the employer is not strong, could see the scheme enter the PPF. Trustees may be deemed to have acted rashly in allowing “normal” transfer values that put the scheme funding at risk longer term
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Members are also incentivised to cash out early if companies are likely to go bust, leaving those remaining in the scheme exposed
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Trustees should take into account individual scheme circumstances and make a decision based on scheme limitations (e.g. lack of funding) and deficit
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There is a time pressure to value schemes now ahead of requests, but the focus on DC pensions allows trustees of DB schemes to remain switched off from the issues.
SCHEME DISPUTES AND THE PENSIONS OMBUDSMAN
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If there is a risk to the fund, trustees can delay payment of a transfer value beyond the statutory timeline, however, this can bring a scheme into disrepute and trustees can be penalised by the Pensions Ombudsman if a delay is not justifiable. Trustee should apply to the regulator in good time, where an extension is needed
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Trustees may become overly cautious due to pension liberation scams but also cautious to withhold transfers due to potential fines
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DB to DC transfers must be advised by an FCA regulator; some IFAs are very experienced but others are not equipped with adequate pensions experience to give the robust advice needed
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There is a real danger of ill-informed decision-making from members and people being ripped off
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Trustees could be encouraged to make transfers because of determinations made by the Pensions Ombudsman.
WHAT IS THE DUTY OF THE TRUSTEE TO ADVISE THEIR MEMBERS?
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There is a fine line between promotion and informing
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While DB to DC transfers is an existing right and so you would not necessarily have to inform members, best practice would be to write to scheme members and let them know
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The ‘Guidance Guarantee’ may open up the market to fraudsters who can call up pretending to be advisers. • The ‘Guidance Guarantee’ whilst a positive free service introduced by the government, it is not enough
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Risk of a large guidance gap in the market
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It is in employers interests to make sure the workforce is engaged around pensions e.g. through offering preretirement counselling and pre-event/options guidance
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Awareness and engagement need to grow to prevent vulnerability to scams
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Trustees cannot police what happens to pension funds once they have been taken out of the DB scheme, transferred to DC and then cashed out. The money has left the system and sometimes has left the UK
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There is pressure on trustees and providers to become investment experts, however, if people who are not qualified to do so are seen to be offering financial advice, this could put them in severe jeopardy
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There is a huge opportunity for the commercial pensions sector to come in and offer guidance around options at retirement and beyond. Given the guidance gap that will exist, this should be encouraged
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JLT Employee Benefits is working on a guidance qualification for administrators and others (e.g. paraplanners and guidance guarantee providers) who deal with pension scheme members on their options and choices, in conjunction with the Pensions Management Institute and will be launched on
INDIVIDUALS DRIVING CHANGE
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For the first time ever, individuals could be driving the change and flexibility as opposed to institutions
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Members who transfer out now may get a better deal than those left in the scheme or who choose to transfer out later
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Companies and trustees are waiting to see what will happen
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Annuities are an expensive way to secure benefits, but guaranteed (insured) for life
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DB to DC transfers could save money for members and schemes; everyone has the right to take a transfer value to a valid arrangement
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Members could be incentivised to leave DB schemes through 15-20% enhancements or simply by being attracted to the available flexibility in DC
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For trustees, cashing out lessens risk; for employers, their pensions costs may be less; for the employee, they have greater flexibility and control over their pension
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There is a worry, however, that people will end up relying on the state pension after spending their cash.
CHANGING INVESTMENT PATTERNS AND ASSET ALLOCATION
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Trustees are investing in lower risk assets, when the landscape is changing toward potentially longer term horizons
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Greater need for liquid investments, which may bring down returns
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Risk rates on schemes – are they updated?
TRIVIAL COMMUTATIONS
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For schemes, you need to have a lot of them before they become significant; however, the amounts involved are now much higher
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Definition of ‘trivial’ is currently not more than £30,000, which is significantly larger than the previous ceiling of £18,000 and may as a result be more attractive to individuals and schemes.
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