Greater scrutiny of transfer incentive exercises needed

The Pensions Regulator today calls for greater scrutiny of transfer incentive exercises, warning trustees of the risks these pose to members' benefits.

Speaking at the NAPF Annual Trustee conference, David Norgrove, chair of the Pensions Regulator said:

“Trustees should start from the presumption that such exercises and transfers are not in member interests. If a company is willing to encourage the transfer, the company's gain is likely to be the member's loss.”

The effect of the economic climate on pension scheme deficits has led many employers to review the form of the pension provision they offer to their employees. This in turn has fuelled the level of activity in the de-risking and the liability-management markets.

Since regulatory guidance on inducements was published in January 2007, transfer incentives or enhanced transfer exercises have become more prominent and discussion about these exercises has increased. Many parties including trustees, employers and advisers have raised concerns over such activity.

Reports have been made of a number of worrying tactics – including:

• the offer of advice paid for by the employer - on the condition that members take that advice
• excessive pressure to make a decision – with constant emails, phone calls, and even home visits
• the provision of misinformation, including a strong suggestion that the future of the scheme is at best uncertain and that it is in the interest of the member to transfer out; and
• putting excessive time pressure on members to make a decision - suggesting that there isn't enough money to go around so members must move quickly to take advantage of the offer.

David Norgrove added:

“There may be individual circumstances that lead some individual members to make a transfer decision based on sound rationale and advice – but in general it is unlikely to be in members' interests to transfer out of a DB scheme.

“We believe that trustees should engage with such exercises and should ensure that members are aware of the issues.

“Our stance is in line with the FSA's guidance which reminds firms that in reviewing such financial promotions, they will start from the presumption that such transfers are not suitable.

“Where behaviours are particularly concerning, we may look to use our anti-avoidance powers and we ask trustees to be vigilant in exercising their fiduciary duties.”

To view the full speech text please visit: http://www.thepensionsregulator.gov.uk/

The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:

• collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
• issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
• direct pension schemes as to how to calculate their liabilities and the contributions required;
• issue a contribution notice where there is an attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.

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