Transfer exercises may be an attractive way for employers to reduce their DB liabilities following the pensions’ freedoms, and certainly a cost worth bearing, says Ian Gutteridge at Premier Pensions Management


In the past, enhanced transfer value (ETV) exercises grew popular among employers seeking to unburden their balance sheets of DB schemes, particularly in deferred member cases.

Hoping to de-risk their scheme but unable to afford a buy-out, employers would approach members to ‘enhance’ their pension transfer value, by either increasing the calculated transfer value of the member’s benefits or making an extra cash paymentQuite rightly, extra cash payments fell by the wayside. “From an ethics point of view, they did not feel right”. Instead, enhanced transfer offers continued for a period of time.

We will see ETVs without the E”

But from April 2012, “ETVs really went out of fashion,” says Gutteridge. “This is because the FCA changed the assumptions that had to be used as part of the analysis, and all of a sudden employers realised you’ve got to put in a lot more money in to make these sorts of exercises work.”

Although ETVs are unlikely to come back in style, Gutteridge says we will see “ETVs without the E”.

Since the introduction of pensions’ freedoms, he thinks transfer exercises could become more attractive for employers, trustees, and individual scheme members alike.

Transferring from a DB to a DC scheme, albeit without an enhancement, means a member can ultimately draw down on the overall value of their pension, rather than accepting smaller annual payments. Individuals are likely to find the prospect of accessing a lump sum appealing, even if they incur a tax on encashment, since they are taxed on pension disbursements anyway, says Gutteridge.

“Members will have to pay tax, but might get greater utilisation from a lump sum of, say, £50,000 gross instead of an equivalent pension of £125 a month. A lot of people will be motivated by the bigger figure.


Another strategy often seen, is for the employer to offer a pension increase exchange”

“The way legislation has moved has meant that pension members holding “gilt-edged” DB entitlements, may well be looking over the fence asking ‘are we now the poor relation to all these flexible rules that have come into play’?”

Another strategy often seen, is for the employer to offer a pension increase exchange (PIE). Under this arrangement, an individual receiving or about to start receiving a pension may be offered an increased amount due from the scheme, in return for them giving up their right to receive annual pension increases on non-statutory pension benefits.

Accepting a PIE means the pension is paid at the new, higher rate for life, but without future annual increases—which risks it being eroded by the effects of inflation.

Key to getting this process right and acting in the interests of scheme members is to ensure they receive the appropriate advice before making a decision, says Gutteridge.

An IFA could be used to analyse ‘soft facts’ about members”

Whilst employers must outline options to scheme members, in some circumstances surrounding PIE exercises, they do not have to always provide advice – the onus can be on the individual to make an informed decisionl. But Gutteridge thinks that provided advice is always included, offering these services to members in a targeted way is in the interests of both employers, trustees and the member

Rather than offering advice to every member, employers could pay for it to be given to those “for whom accepting the offer might be a good thing”, he says, adding an IFA could be used to analyse ‘soft facts’ about members, such as their risk and health profile, thus identifying the members most likely to benefit from the offer early on during the process.

In the event that a member is interested in a PIE or a pension transfer, but analysis shows they have no other investments, or limited understanding about the stock market, then an advice service would tell them not to go any further, he says. Employers and trustees would then have peace of mind that only appropriate individuals accept a PIE or transfer value, he adds.


Trustees are open to be criticised”

Why would employers want to pay for this when they are not mandated to? Gutteridge States that “some initiatives fall under a Code of Best Practice and a need to provide advice could be required”.

However, where there is no obligation to provide advice, he thinks if scheme members are not fully informed of options available to them, trustees could be subject to future criticism. “It’s a dangerous strategy from the trustees’ point of view if they say ‘no; we don’t want to get involved in this’. Providers have been criticised [in the past] by regulators for failing to give policyholders the full range of options available. Trustees are [also] open to be criticised.”

Delivering pension reform advice has, in particular, been a challenge. “It’s been very much a rush job [with pension reforms], we need to find a way people can get advice clearly, accurately and cost effectively,” says Gutteridge.