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DB transfers in the time of COVID-19
11 May 2020

DB transfers in the time of COVID-19

Transfers from Defined Benefit (DB) pension schemes are an emotive topic at the best of times. In these uncertain times, the focus on them is bound to increase. We have already heard anecdotal evidence of an increase in interest in transfers, driven by members who have concerns about their jobs and the ongoing viability of their employers, and who are thinking of a transfer as a potential way to access more income if needed.

There are, however, several issues that DB scheme sponsors and trustees should be considering at the moment in relation to transfers.

Not surprisingly, financial markets have been very volatile over the last month. Most schemes will have seen some deterioration in their funding levels although well-hedged schemes will have fared much better than unhedged schemes. Gilt yields and Retail Prices Index
(RPI) expectations have varied significantly over the period. Some employers, worried about cashflow and business sustainability, have agreed temporary reductions or suspensions in recovery plan contributions with the trustees of their schemes.

All of these factors should prompt sponsors and trustees to consider transfer values carefully. Are the assumptions used to calculate them still appropriate? Should transfer values be reduced to reflect the increasing level of scheme
underfunding? Should transfers be halted temporarily because of liquidity concerns (especially if the sponsor has ceased contributions temporarily) and the priority to pay pensions due?

The Pensions Regulator’s (TPR) guidance published on 27 March, effectively allows transfer values (payments and quotations) to be suspended for three months to allow sponsors and trustees time to address these issues.

We also need to consider transfers from the members’ perspectives. Our recent research1 highlighted that there has been a fall (and likely to be further falls)

in the numbers of firms that can advise members on transferring from a DB scheme due to increasing regulatory focus and professional indemnity insurance premiums.Members may therefore find it hard to find a firm on the high street that can advise them.

If members can find a firm to advise them, and want to look at transferring because of income concerns as a result of COVID-19, they are very likely to be classified as ‘financially vulnerable’ and fall under the adviser’s Vulnerable Customer policy. Unless the member is in severe financial hardship, the advice is likely to be not to
transfer because of the uncertainty around the length of the current circumstances, the availability of furlough payments etc. This could push vulnerable members into the arms of scammers, a concern shared by TPR which
has explicitly cautioned trustees to be mindful of this risk.

It is therefore essential that sponsors and trustees communicate with their members, setting out some of the relevant issues around transfers, to prevent members falling prey to scams. They should also think about putting in place a framework to support members through the transfer advice process, as we described in
our recent research2. Action must be taken now to give members every chance to avoid the possibility of a bad transfer outcome.

Notes/Sources

This article was featured in Pensions Aspects magazine May 2020 edition

back to Pensions Aspects Magazine

Last update: 19 January 2021

Simon Taylor
Simon Taylor
Barnett Waddingham
Partner

Associate DB Pensions Consultant, 2 days from home

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