Encouraging, or even mandating, partial defined benefit (DB) pension transfers should be a no-brainer as far as members are concerned.
Opting for a partial transfer means, instead of being forced to choose one road or another, members can combine the two. They can transfer part of their benefits to access flexibility in a personal pension environment and all the advantages that can bring, such as controlling flow of income, designing the format of dependants’ income, and passing money on to heirs. And at the same time, they can leave a bedrock of ‘guaranteed’ pension in the DB scheme to provide a minimum secure income.
This option will undoubtedly benefit those who do not want to transfer all their benefits out. This may be because they do not want to take on that risk. Or maybe they have concerns about the solidity of the parent company, and worry that, if the scheme had to transfer into the Protected Pension Fund (PPF), they would lose their benefits over the maximum PPF capped pension.
Rock and a hard place
Partial transfers may not, though, be as attractive for trustees. For most schemes, it will mean additional administration and potentially higher costs.
Even cutting the benefits in two may not be a simple process: should it be a straight percentage of all tranches of benefits, or is it easier to cut away one or two tranches, such as only post-1997 benefits, and offer those as a transfer?
So far, there has been little guidance from The Pensions Regulator on what is the best road to take. For the trustees this may mean additional work, but without being able to remove the member completely from the scheme’s responsibility.
If the whole of the safeguarded benefits under the scheme are worth more than £30,000 the member must seek advice, regardless of the size of the partial transfer. There is no option to slice and dice the pension transfer just to get around the advice requirement. So, advice may be required but potentially on a much lower transfer value.
In addition, advising on a partial transfer is a fundamentally different process: one that is more difficult and costly. This may mean it will be tough for people to find advisers willing to get involved in the partial transfer market.
Partial transfers are not widespread. Recent research by pensions consultants Lane Clark & Peacock and insurer Royal London stated only one in six schemes currently offer them. But there are some who would like to see it become compulsory for trustees to offer them.
It is reported around 80,000 people transferred last year. This is less than 2% of all private sector deferred DB members. Mandating partial transfers would increase the number of DB transfers substantially.
It would be interesting to see what value of money members are offered on their transfer. I doubt taking a 50% partial transfer would cost 50% of the whole cash equivalent transfer value (CETV). Fixed costs, and the additional costs associated with the partial transfer, will need to be factored in.
If they are not able to remove the member from their books – and their responsibility – trustees may be less inclined to offer a CETV designed to ‘incentivise’ the transfer.
Rules and regulations
Partial transfers are far from being a simple entry on a wish list. They come with more complexities for trustees, who already have a lot on their plate. If they were to be encouraged or mandated, they would need the right framework.
The Pensions Regulator would need to issue guidance for trustees on how to manage them, and on the right advice environment so those having to seek advice can get it, regardless of how small their partial transfer is. The Financial Conduct Authority will need to develop the right regulatory guidance as well.
Rachel Vahey is product technical manager at Nucleus.