DEBI O’DONOVAN
The use of enhanced transfer values to reduce defined benefit pensions risk is causing a stir in adviser, employer and trustee circles.
For some time ETVs have been viewed with scepticism, with few believing that the employee is going to be better off under such a deal.
Of course employers don’t relish the exercise either. But the odds, such as they are, are stacked in favour of the employer – they have advisers to call on and have more to lose by not doing it rather than doing it. For employees the opposite is true.
ETVs are one of the least expensive ways for an employer to de-risk its DB scheme and involves getting members to transfer out the DB scheme into some form of defined contribution plan.
And with falling bond rates making pension funds look ever more unpalatable on company balance sheets, most experts expect a dramatic increase in the use of ETVs over the next few years.
Research released by Hamish-Wilson last month showed that although 8 per cent of its 171 respondents had used ETVs already, a further 22 per cent plan to do so in the next two years. On top of that an additional 12 per cent are looking to do so over a longer timescale.
The great fear is that far too many employees will be persuaded to accept an ETV, perhaps aided, controversially, with a cash payment, with little understanding of the true complexity of the decision.
Even the experts can’t agree on a standard formula for working out the level of an ETV, so what hope does a pension scheme member have of knowing if they are being offered a fair deal?
Regardless of any calculation, incentive or other care taken in the procedure, it all boils down to a transfer of an unpleasant risk from employer to employee and in almost all cases the employee will not fully realise the implications of this until far too late, usually at retirement.
Good employers will work with their advisers to provide the best possible advice at the time of transfer, but it will come to naught if proactive communication and engagement is not ongoing right through to retirement.
Employers do have a duty to stand by their pension scheme members, even if it is unreasonable to expect organisations to keep the huge risks of a DB scheme on their books.
Otherwise what was the point of battling for all this time to keep a DB scheme going, simply to cut staff adrift now?
Debi O’Donovan is editor of Employee Benefits magazine
HAMISH WILSON
The stigma of enhanced transfer value (ETV) exercises appears to be evaporating, with our pension fund survey suggesting that a third of schemes are expecting to carry out exercises at some point in the next few years.
While several employers have carried out ETV exercises, many more have held back. However, our survey indicates the number doing so will increase. The increased interest is likely to reflect falling bond yields which, as the credit crunch recedes, threaten to make pension liabilities an unwelcome item on company balance sheets.
ETVs can also be used to manage the end game and reduce costs in the run up to buying out.
ETVs may be the only viable option for smaller schemes who cannot cope with the cost of buy-outs or buy-ins and the complexity of more sophisticated solutions such as longevity swaps.
But whatever the size of scheme, ETVs, like all other possible courses of action, should be considered as part of a broader strategy. It is also important to get ETV exercises right first time as it may not be possible to have a second bite at the cherry.
Our survey of attitudes towards ETV exercises received 171 responses, from schemes ranging from under £50 million of assets to over £1 billion, with the smallest having just 60 members and the largest over 325,000. It showed that a total of 34 per cent expect to carry out an enhanced transfer value exercise at some point in the future. This compares with just 8 per cent who have done so to date.
Hamish Wilson is senior partner at HamishWilson