DB to DC transfers – a trustee view
24th July, 2015
Tread carefully when approaching DB to DC transfers, cautions trustee Chris Roberts
The subject of DB to DC transfers will forever be tainted by the Securities and Investment Board pensions misselling reviews of the 90’s.
Many advisers already have concerns about recommending DB to DC transfers and with the possibility of members making poor decisions on the back of pension freedoms, we would expect concerns to continue.
As trustees we should be pro-active in educating members on the options available. We would not foresee a time where communicating changes and acting proactively would not be deemed “Best Practice”.
To take this a stage further, if a member who would benefit from transferring does not know the option is available, has the trustee failed in the duty of care to that individual?
We are keen to ensure members are given a full range of options and make informed decisions. The need to take advice over £30,000 should ensure any members, making what will be material decisions with large values, do so with their eyes wide open.
How do we do this? One obvious way is through clear communication, starting well in advance of retirement. We believe a simple option to explain pension freedoms should be on the retirement form. Without clear information relating to pension freedoms, their place in a member’s retirement planning thinking and the need to take professional advice will not be a serious consideration for members.
Trustees need to look at provisions for non statutory transfers, and to decide if a review is required. If the trustee is not going to allow transfers within one year of retirement then there seems to be a need to communicate this to members. Otherwise, individuals could lose the right to use freedoms, without knowing this had occurred. This would mean the retirement communication chain would begin at least 18 months in advance of retirement, as opposed to 3-6 months. There is an argument for commencing communication from minimum pension age.
The final consideration is looking at experience and protecting the scheme. The trustee board must safeguard cashflows and look at the transfer value basis closely. If transfers increase, the trustees must safeguard the benefits of the remaining members. This would be in tandem with sponsoring employers as there has to be close consideration of the employer covenant and scheme support.
The process is ever-changing, and we will continue to communicate and engage within our appointments to bring best outcomes. We are not recommending knee-jerk wholesale rule changes, as there needs to be a period of reflection before commencing costly (and difficult to undo) legal work.