Is now a good time for an ETV or Pie exercise?

This new flexibility is not automatically available to members with defined benefit pensions. But members do have the option to transfer their benefits to a DC arrangement to take advantage of the changes.

This means 2015 is shaping up to be the ‘year of the transfer value’, as we expect to see a significant increase in the number of DB members transferring to DC arrangements as a result of the new freedoms. 

As a first step in response to the new rules, many companies and trustee boards have been working to amend retirement processes to make sure sufficient information is provided to members who are able to draw their benefits from April 2015.

This includes making amendments to the retirement process to embed transfer value quotes in retirement packs on an ongoing basis, which means members are provided with information on all the options available at the point they retire. 

This is the natural point when many members may consider transferring out as they would need to make a decision on the form of income that best meets their needs in retirement.

A recent Aon Hewitt survey suggested around 25 per cent of schemes are making changes to the retirement process to automatically provide transfer value quotes to members at retirement.

Many are going a step further than this and are also providing access to some level of free independent financial advice.

Later in the year we expect to see attention turn towards bulk transfer value exercises for those members who can draw their benefits immediately, and enhanced transfer value exercises for younger deferred members

This ensures members can make an informed decision on the options available and should also lead to more risk reduction if more members choose to transfer their benefits out of the DB scheme. 

Later in the year we expect to see attention turn towards bulk transfer value exercises for those members who can draw their benefits immediately, and enhanced transfer value exercises for younger deferred members. 

This marks an interesting shift in the market, as we have not seen many ETV exercises during the past few years.

This was mainly driven by changes in the IFA market and the way transfer values are assessed under Financial Conduct Authority rules.

But given the new flexibility we are already seeing a number of exercises planned for later in 2015 and early 2016.

Historically we have seen take-up rates of around 15-30 per cent for bulk transfer value exercises, although this varies depending on the level of transfer value and enhancement on offer.

We expect this to increase due to the new flexibility and increased awareness of the options available. 

Slice of the pie

The focus on transfer values is in direct contrast to 2014, when we saw a significant amount of activity around pension increase exchange exercises.

Pie is the only real choice for members who have a pension in payment and is now a well-trodden path following on from the publication of the Code of Good Practice in 2012, which effectively provided a framework for a successful exercise. 

Interestingly, this is an area where we have seen higher take-up rates – typically in the range of 25-45 per cent and, importantly, excellent feedback from pensioners who have been through the process and who are happy to be provided with additional choice.

While the main focus for many companies is on bulk transfer exercises, we do still expect to see Pie activity throughout 2015 and into 2016 as companies consider all opportunities for derisking.

Ben Roe is head of liability management at Aon Hewitt