But we don’t work in a bubble and we know we won’t get far unless the pensions industry works collaboratively with us – and works together – to ensure savings are safeguarded.
In a great example of working successfully together, the pensions industry joined forces in 2012 to protect savers who are offered incentives to transfer from their defined benefit (DB) scheme or modify their arrangements.
In response to concerns that members were at risk of being short changed by employers seeking to de-risk through Incentive Exercises (IE), the Industry Working Group was set up which produced the incentive exercises for pensions code of practice.
The industry code sets out good practice for trustees managing transfers.
Transfers can present a risk to savers because they may make the wrong choices and consequently lose valuable benefits. Whether transferring in response to an IE, or to take advantage of pensions freedoms and flexibilities, we have been clear that in our view, it remains unlikely it’s in the best financial interests of most members to transfer out of their DB scheme.
DB arrangements often provide a promised, pre-determined level of benefits that are underwritten by an employer and its covenant. In many cases, it is also unlikely that the application of best estimate assumptions used to calculate the transfer value, would provide benefits of equal value as those given up.
But we do of course recognise that members may wish to consider the options available to them, in light of the flexibilities being offered, and in light if their own, personal circumstances. In these instances, we strongly urge savers to ensure they access sound financial advice.
Members considering transferring safeguarded benefits of more than £30,000 will need to get independent financial advice from an FCA-authorised adviser, and the advice should be specifically tailored to their personal aims and circumstances.
The responsibility of trustees is that before transferring such a member’s benefits, they must ensure the member has obtained financial advice.
We also expect trustees to provide all relevant information to savers in a clear and timely manner so that they have time to obtain appropriate independent financial advice. Trustees should not transfer any benefits until they have received a written request from the scheme member to transfer – and specifically checked that they have received any necessary independent financial advice from an appropriate adviser.
The requirement to obtain advice will apply whether the transfer is made under the scheme rules or under the legislation. It will also apply to the conversion of safeguarded benefits into flexible benefits within the same scheme – as well as to transfers of safeguarded benefits to a separate defined contribution (DC) scheme.
Ensuring that transfers are carried out correctly and safely is a cornerstone of good governance. The stakes are high – savers and their families bear the consequences of poor financial decision making which can have a lasting negative impact.
By working together, and by referring to the industry code, the pensions industry can continue to ensure members have the time and information they need to make the best choices to ensure they have the money they need for retirement.
By Louise Sivyer
Principal – Policy