Regulator encourages pension schemes to consider transfer value cuts

Royal London says the letter, which it obtained under a Freedom of Information request, has been sent to schemes who have been experiencing a large volume of transfers, as part of a drive to protect members from unsuitable transfers and from pension scams.

However the letter also highlights that if trustees offer 'overly generous' transfer values to those leaving the scheme, this could be to the detriment of those left behind.

The letter says: "In light of recent events concerning your scheme sponsors, we would expect you to take advice from your scheme actuary about whether the basis on which the CETV [transfer value] are calculated remains appropriate... This would allow you to judge whether a reduction of further reduction should be applied to CETVs in light of [an] assessment of covenant strength."

A particular concern appears to be the situation where workers transferring out are offered a cash lump sum on relatively generous terms at a time when the pension scheme itself is in deficit. If large numbers of members transfer out on generous terms there would be a risk that the funding position of the scheme could worsen and the risk of remaining members not getting their full pensions could increase.

Steve Webb, director of policy at Royal London, commented: "I would hope that well run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out. But the Regulator’s letter is a helpful reminder to all schemes that they need to be fair not only to those transferring out but also those left behind, especially where the scheme in question is in deficit."

Steven Cameron, pensions director at Aegon, said: “Trustees have always been required to take advice from their scheme actuary on cash equivalent transfer values including if they should be reduced to reflect scheme underfunding at any point in time. This ensures payouts to leavers don’t create a greater deficit within the scheme, further reducing the security of remaining member benefits.

“It is interesting that the Pensions Regulator has chosen to write to only 14 schemes, suggesting particular concerns for them, and that this has emerged only under a freedom of information request.

“It does highlight how difficult it is for trustees, with their scheme actuary’s help, to strike the right balance, as too cautious an approach might lead to those who transfer out receiving less than their fair share. This is made even more complex as changes in economic conditions and investment performance can produce quite sharp changes in scheme funding levels over relatively short periods of time.”