Pension transfer offers on the increaseCash incentives may mask a poor deal
20 August 2011
Accountants KPMG have reported that over 90,000 people have been offered enhanced transfer values (ETVs) to move away from their defined benefit (DB) pension scheme in the last three years. A further 70,000 are expected to receive a similar offer this year.
Transfer values boosted
Enhanced transfer values are normally offered to members of costly final salary pension schemes by employers who are keen to reduce their long-term liabilities. They hope to persuade scheme members who no longer work for the firm to transfer out of the defined benefit scheme and into a less advantageous money purchase or defined contribution pension scheme.
For individuals, the difference is that they surrender a pension promise, based on their salary and number of years service, for an individual 'pension pot', invested in stocks and shares, with which they will eventually have to buy an annuity.
By offering an enhanced transfer value, the employer is topping the cash equivalent transfer value a member could normally expect to receive if they decided to switch to another scheme. The deal often includes a sum of cash as well, paid to the member as an extra incentive.
Pension switching criticised
Although an enhanced valuation may seem attractive, the practice of offering ETVs has been criticised as offering scheme members a poor deal. By moving from defined benefit (DB) to defined contribution (DC), employees are assuming a higher degree of risk, which is transferred away from the employer. The certainty of their pension income is lost.
A second, less obvious drawback is that many DB schemes include generous provision for spouses and widows. By transferring to a defined contribution (DC) scheme, an individual may surrender these unwittingly. In the same way, they may lose index-linking which offers in-built protection from inflation.
Earlier this year the Pensions Minister Steve Webb expressed concern at the potential detriment pension transfers could cause: 'We urgently need to make sure that we root bad practice out of the market. The industry can’t go on offering superficially attractive deals to people that ultimately leave them badly out of pocket.
'I am very concerned that people are making the wrong choices about their pensions and are missing out on substantial amounts of retirement cash.'
Expert advice essential
Transferring out of a DB pension scheme is normally counseled against by independent advisers. In the KPMG survey only one in four decided to accept the ETV offer, with three quarters choosing to leave their pension in the original DB scheme
Which? Pensions expert, Ian Robinson says: 'The loss of benefits and potentially lower return can have serious long-term consequences. Unless you are in very poor health and might benefit from an enhanced annuity the chances are you're better off staying where you are'.
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