Articles - Good transfer decisions

How should trustees respond to the current demand for transfers out of defined benefit schemes, and what actions should they take to minimise the risk of members making poor decisions? The Pensions Regulator (TPR), in its response to a freedom of information request published in May, estimates that 100,000 transfers out of defined benefit (DB) schemes took place in the 2017/18 financial year.

 By Jane Beverley, Principal and Head of Research, XPS Pensions Group
 The Office for National Statistics (ONS), as part of its latest quarterly data set on insurance companies, pension funds and trusts, published figures showing that £34bn was transferred out of occupational pension funds in 2017, a massive increase on the £13bn that was transferred out in each of the two previous years, with a record £10.6bn being transferred out just in the first quarter of 2018.
 It is clear that pension schemes are experiencing a greater demand for transfers out than at any point in their history.
 The key drivers for this trend have been the continuing high level of DB transfer values and the desire of members to be able to transfer out to access the flexibility available through pension freedoms in defined contribution (DC) schemes. It is also possible that the number of ‘bad news’ stories about DB pensions, from BHS to Carillion, have contributed to some ‘rogue’ advisers seeking to encourage members to transfer out.
 Post ‘freedom and choice’, transferring out may sometimes be the right decision for DB pension scheme members who want to access the flexibility available in a DC arrangement, but there are risks of members being poorly advised, and even transferring their benefits into scam vehicles.
 In its latest annual funding statement, TPR notes the current transfer trend and asks trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made. For example, in some cases, trustees may find that a large number of transfers are being advised on by the same adviser, or are being made to the same scheme. Whilst these factors are not necessarily indicators of scam activity, it could indicate a pattern that trustees should be aware of.
 As trustees are effectively being put into the position of transfer watchdogs, what actions should they be taking? As a minimum:
 • Check that transfers are being made to genuine occupational pension schemes, private pension providers or master trusts.
 • Check that any members with a transfer value in excess of £30,000 have received independent financial advice from an FCA-authorised adviser with permission to advise on pension transfers.
 • Where these checks raise concerns, contact members to ask further questions about the circumstances of the transfer request.
 • Monitor transfer activity and report any concerns to Action Fraud, the FCA and/or TPR where appropriate.
 Even where the first two checks are passed, trustees should consider whether further investigation is needed. The latest version of ‘Combating pension scams: A code of good practice’, published in June 2018, encourages trustees, providers and administrators to make an early telephone call to members to help identify the circumstances of the transfer.
 Ultimately, if the member has a statutory right to a transfer, the trustees have verified that the receiving scheme appears to be a genuine occupational pension scheme, and the member is determined to proceed, under current legislation, the trustees have little option but to proceed with the transfer. However, having the right processes in place to check whether the transfer is legitimate will help to reduce the risks for both trustees and for pension scheme members.
 Trustees can also help to minimise the risk of poor transfer decisions by ensuring that members have access to the right information to help them decide. Initially, after the pension freedoms, many trustees were reluctant even to mention in retirement packs that members might have an option to transfer their DB funds out of the scheme to access DC flexibility. Over time, this picture seems to have changed with many trustees now recognising that more of their members may value increased flexibility and so preferring to communicate details of the transfer option alongside the full range of options at retirement. That will make it harder for unscrupulous advisers to suggest that the option to transfer is being ‘hidden’ from them in some way, and means that members will have access to high quality information from the trustees on the transfer option.
 Good processes and clear communications are the key to trustees ensuring they carry out their duties effectively and protect their members from poor transfer decisions.

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