BA transfer value review puts spotlight on older members

In a new era of freedom and choice, transfers from defined benefit to defined contribution schemes can provide members with more flexible access to high capital value savings, a particularly favourable proposition in the current low-yield environment.

In anticipation of an uptick in the number of members nearing retirement who opt to take a transfer, many schemes have either begun to, or have already reviewed the transfer value basis; namely, the actuarial calculation used to derive a best estimate of the cost of providing the benefits to members on a case-by-case basis.

Trustees of the British Airways Pension Schemes told members about changes to the transfer value basis set to be implemented from April 1 this year, in a letter sent to all members in October 2015.

In the letter, members were assured that the scheme’s actuary reviews the factors used to calculate transfer values on a regular basis, but the most recent review is “likely to mean a decrease in transfer values for members close to, at, or over normal retirement age and an increase for younger members”.

A spokesperson for the BA Pension Schemes said assumptions and factors reflect changes in market conditions and expected investment returns on a regular basis.

“Members of the BA Pension Schemes were informed in October 2015 that… transfer values would likely be lower for older members and higher for younger members. The assumptions consider the potential returns over the longer term with allowances for different age profiles,” the spokesperson said.

“Broadly the changes bring the assumptions closer together and if looked at in aggregate, the net impact of the changes on the financial position of the schemes is broadly neutral.’

Fairness for members

Paul Darlow, head of proposition development at consultancy Xafinity, said it is good practice for trustees to keep their transfer value basis under review.

“Many, even most, pension schemes will have done so over the last 18 months given the expectation that more people will consider taking transfer values in order to access the freedom and choice options,” he said.

Darlow said transfer values for older members can be higher than the scheme’s liabilities for the same members under some bases – which could lead to detrimental movements in scheme deficits if large swathes of older members opt to transfer out.

“It is not uncommon for schemes to reshape their bases to avoid this – the outcome would be as observed in the BA case – older members’ transfer values reduce, younger members’ transfer values increase,” he said.

“What BA seem to have done appears totally sensible – I have seen many pension schemes do the same.”

Phil Wadsworth, director at consultancy JLT, said there has been an uptick in interest among members with high transfer values since the introduction of freedom and choice last April, leading many schemes to review their bases to ensure fairness across the scheme demographic.

“In the BA case the relative values have swung towards the younger members. It looks like they have reduced the rate of return they expect to earn up to retirement but increased it post-retirement in the basis,” he said.

Wadsworth said schemes should avoid being “overly generous” to older members who already have multiple incentives to take a transfer value.

“You can’t be unfair in setting it, but you needn’t make it overly generous when the drivers of freedom and choice and... estate planning cause members at that age to take the transfer value.”

Basis review

Alex Waite, partner at consultancy LCP, said any scheme that has not considered their basis “probably needs to”. 

Among the key areas to consider, Waite said trustees should ensure they:

• are up to date with market conditions;

• are being consistent in the way scheme assets are invested;

• have a clear idea of how the scheme asset mix is likely to change going forward and how changes might impact investment returns;

• balance the interests of members transferring out with protecting the benefits of those remaining within the scheme.

Waite said a review of the basis is particularly important for schemes with a weak underlying covenant.

“The cases where you get really nervous are where you have a weak covenant and high take-up of transfer values,” he said.

However, Waite added that it is important for members to get a transfer value quote from their scheme, as many are surprised by the high capital value of their benefit.

“I’ve seen a number of members very surprised to see that their pension is worth more than the value of their house,” he said.

“It might be a really good idea to take the transfer value now.”