Six steps to manage a rise in DB-DC transfer requests

Aon Hewitt's Ben Roe outlines the steps defined benefit trustees need to take to prepare for member transfers, in light of the new flexibilities.

Although not right for everyone, examples of those who will genuinely be better off by transferring their benefits out of a DB arrangement include those in poor health or who are single, or those worried about the security of the pension scheme.

Key points

Trustees should familiarise themselves with the Pensions Regulator's recent guidance on DB to DC transfers
They should make sure transfer values can be calculated easily and that terms are appropriate
Member communications should be updated to comply with requirements and trustees should decide how much information should be supplied in retirement packs

Historically very few members have sought to transfer their benefits out of DB schemes, but we expect to see an increase in transfer activity.

The key question is how many members will want to transfer once the new flexibility is in place?

There are a number of actions trustees should work through to make sure they are prepared for a possible spike.

1. Read the guidance from the Pensions Regulator

The regulator recently issued guidance for trustees on DB to DC transfers. This provides a useful starting point as it sets out a number of issues which trustees need to consider in light of the changes.

2. Update communication material and make sure processes comply with legislative requirements

In the future, members must obtain appropriate independent financial advice in order to transfer DB pensions valued at £30,000 or higher out of any scheme.

Draft regulations are now in place to define the actions trustees must take. These include providing extra information to members on the requirement to take advice and then checking that the relevant advice has been provided.

Trustees should check how their administrators intend to comply with the new requirements and review any revised communication material.

3. Make sure the transfer value terms are appropriate

While statutory guidance for determining the transfer basis is unchanged, trustees should review the suitability of their current transfer basis and consider whether it is appropriate for all members.

It is not uncommon for a transfer basis to be more prudent than the funding reserve for members close to or at retirement age, especially if the funding basis makes allowance for commutation but the transfer basis does not.

It is important to understand the impact of increased levels of transfers on the funding position of the scheme and if necessary make changes to protect the funding position.

4. Make sure transfer values can be calculated easily

In the short term, trustees should assess the ability to calculate transfer values efficiently for a greater number of members. Now might be a good time to invest in updating transfer value calculation models to cover more members.

Trustees should also ensure the administrators have sufficient resource to cope with a possible increase in activity without impacting on the running of the scheme.

5. Decide how much information to supply to members at retirement

At one level this could just involve amending the retirement packs to provide members with generic information on the new options available.

Some trustees are going further than this and are starting to automatically provide members with access to a transfer value quote with each retirement pack.

A recent Aon Hewitt survey indicated that around 25 per cent of schemes are making transfer value quotes available automatically at retirement. This can reduce the risk of spikes in activity by having an automated process to produce quotes.