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Freedom and choice: return of the Enhanced Transfer Value?

Recent changes to pensions flexibilities may lead to an increase in the use of enhanced transfer value exercises by employers as part of a de-risking strategy.

The flexibility being brought in by the Government to enable members to use their pension pots as they wish, rather than having to purchase an annuity, could lead to a return of Enhanced Transfer Value (ETV) exercises undertaken by employers of defined benefit pension schemes who wish to manage down the financial volatility of their pension arrangements.

Financial advice

A key element of the removal of the previous restrictions on use of pension pots is the necessity for members to receive financial advice to enable informed decisions to be made.  Whilst acting in the interests of members and providing options and information, trustees must be careful they don’t inadvertently give information that could be considered to be advice to members. 

Reasons for transferring

Like in the past, members may have expressed a desire to transfer their defined benefit pension entitlement to a defined contribution arrangement for various reasons including:

  • personal circumstances (eg no dependent or spouse’s pension required)
  • confidence in their own investment choices
  • less reliance on sponsoring employer’s covenant

An independent financial adviser who has specialist pension knowledge will have taken these reasons into account (in contrast to the guarantee of a defined benefit pension) when advising on the suitability of a transfer. The new flexibility will be an additional item on the ‘pro’ side of the transfer considerations. 

This means that previously shelved ETV projects may be revisited by employers and their advisers with the expectation that there may be a higher take-up. 

Additional reasons for ETVs

Also, as it has been a decade since the 2004 Pensions Act and the introduction of the scheme specific funding regime, it could be that most pension schemes have achieved a healthier funding level (perhaps closer to PPF levels if not their technical provisions) in line with their recovery plans and a related decrease in the reduction to any transfer value (on an insufficiency report).  The impact of this in itself could make an ETV project more appealing to employers. The reasons being that additional funds required for the “Enhancement” may not be as great as would have been previously required in order to make the offer both attractive to members and acceptable for financial advisers to recommend. 

ETV guidance

Any employer (or trustee board) considering an ETV exercise should bear in mind the industry’s voluntary Code of Good Practice for Incentive Exercises for Pensions which focuses on the following seven principles:

  1. no cash incentive contingent on acceptance
  2. advice available for members
  3. clear, unbiased and fair communications
  4. retain records
  5. sufficient time periods (no undue pressure)
  6. vulnerable client policy for advisers
  7. all parties aware of roles and responsibilities and act in good faith

 

Author: Lucy Herbert

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.