As pensions minister Steve Webb orders a review of controversial derisking exercises, Owen Walker discovers how Axa and ITV are currently approaching them
Axa and ITV are the latest pension schemes trying to remove the risks of longevity and inflation by offering members incentives.
The working group is due to report its recommendations in the new year, but schemes considering offering ETVs or Pies before should consider the following safeguards:
Offering a cooling-off period – the working group is likely to recommend schemes offer members a cooling-off period for members after they make a decision so they can change their minds;
Communicate clearly the likely impact on retirement income – this would include graphs that take into account the likely life expectancy of a member;
Timing of communication – Webb has criticised poor practices, such as schemes offering members cash incentives close to Christmas. The working group is likely to recommend a responsible approach to timing;
Offering modelling – schemes are called on to allow members to model their own assumptions about their expected outcomes and life expectancy;
Offer advice – the working group may require schemes to recommend members contact IFAs and also offer a phone helpline if members have any queries.
But these options – known as enhanced transfer values (ETVs) and pension increase exchanges (Pies) – have come under fire by the pensions minister in the past year and are currently under review.
Schemes considering offering ETVs and Pies before the government reports its findings should ensure they clearly communicate the implications on a member's retirement income and offer access to independent advice.
They are also called to observe best practice and offer a cooling-off period, where members can change their minds within a set timeframe once they have made their decision.
Insurer Axa recently sent out letters to members of its defined benefit (DB) scheme, offering them a Pie, while ITV has undertaken both ETV and Pie exercises over the past couple of years.
Pensions minister Steve Webb is concerned such practices could end up being the next pensions mis-selling crisis.
He fears members could have reduced income in retirement because they did not understand the implications of offers they were accepting.
Webb has set up a working group to come up with a series of guidelines on offering such incentives, which is due to report its findings in the new year.
Avoiding accusations of bribery
Schemes have often used ETVs to reduce their long-term liabilities and manage their longevity risk. These are offers of cash lump sums to members in exchange for the member leaving the scheme.
This is a legitimate form of risk reduction and, in cases of ill health, can be beneficial to members who can get a higher retirement income through purchasing an enhanced annuity.
But ETVs have often been criticised for offering poor outcomes to members, not least by David Norgrove, former chief executive of the Pensions Regulator, in a recent video on schemeXpert.com.
These bribes … are being hidden behind confusing language
Pies offer members a higher retirement income that is not linked to inflation. This means the scheme will remove the inflation risk but members' income will not rise as prices increase.
The uplift in members’ income will be an advantage in the short term but if they live long enough they will eventually be worse off.
ITV communicated this change to members in a document outlining the impact of taking up a Pie.
In a speech at the National Association of Pension Funds conference last month Webb derided a document sent out to members of a “major” company undertaking a Pie exercise.
“These bribes … are being hidden behind confusing language,” he said.
“I have no problem with firms managing their liabilities responsibly but, despite warnings early this year, I’m still seeing examples of this kind of bad practice.”
Axa recently sent a letter and information pack to retired members of its DB scheme, offering them a Pie.
An Axa spokesperson said: “This offer is entirely optional and provides pensioners with more choice around how they manage their retirement income.
“All members will have free access from an IFA-staffed helpline to support their decision-making.”
Best practice
Mike Smedley, partner at KPMG, who is a member of the working group set up to set guidelines for Pies, said he expects cash, advice and communication to be the focus of the final report.
For schemes considering conducting these exercises, the key to managing the risk of member backlash or regulatory censure is educating the member, he said.
One of the things you can do is to make sure members have a cooling-off period
“It is a difficult thing making sure they understand it. That is the challenge,” he added.
“One of the things you can do is to make sure members have a cooling-off period. They could have two weeks to change their mind if they are not sure."
Smedley, who advises schemes on making Pie offers, said some of his clients had created modellers for members to consider their own longevity and inflation assumptions. Charles Cowling, managing director at JLT Pension Capital Strategies, who works on derisking exercises, said: "We would provide experts at the end of a phone who could explain exactly what it is all about.
“They talk members through what they are giving up and what they are getting. They also make sure they understand it.”
