FSA changes to pension transfer value calculations could cost companies an extra £20bn

The Financial Services Authority (FSA), which regulates the professional advisers brought in to assist employees on making their decision, said that updating the rules used to calculate what benefits employees could lose out on when transferring their savings would ensure that employees got a “fair deal” before taking on the risk that the value of their savings could fall.

However Carolyn Saunders, a pensions law expert with Pinsent Masons, the law firm behind Out-Law.com, said that the FSA’s proposals would make enhanced transfer exercises more expensive for employers - and so discourage their use even where scheme members would be likely to benefit.

A pension transfer is where a pension is moved from a defined benefit pension scheme, such as a final salary pension scheme, to a personal pension scheme. The current transfer value analysis (TVA) process compares what benefits the scheme member will receive from the employer’s existing scheme with those that could be provided by the new arrangements. Some employers will offer some sort of incentive to members who move out of their pension scheme, for example a cash payment or an increase in the transfer value of the member’s benefits.

Defined benefit pension schemes promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. According to a recent report by industry body the National Association of Pension Funds (NAPF), one quarter of such schemes are now closed to future contributions as employers struggle to cope with increasing life expectancies and poor investment results.

By comparison, the value of most personal pension plans is calculated on a defined contribution basis where the final value of the pension the holder receives depends on the performance of the money paid into it. This means it is the holder of the pension fund who bears the full risk of the pension losing value.

In its new consultation, the FSA proposes changing the rules used for calculating mortality to those used by the Board for Actuarial Standards to provide a consistent approach, as well as removing any assumptions based on the gender of the pension scheme member. It will also begin revaluing deferred pensions with reference to the consumer price index (CPI) rather than the retail price index (RPI), in line with the approach adopted by the Government in its 2011 Budget.

“It is vital that employees get a fair deal as more and more employers are looking to reduce liabilities by offering members of defined benefit schemes a move to a personal pension. As things stand, there is a high risk members receive unsuitable advice as a result of the mechanistic approach to analysing transfer values taken by some advisers. These changes are important to make sure that members’ interests are at the centre of any decision to transfer and that any advice to transfer is suitable,” said Sheila Nicoll, director of conduct policy with the FSA.

Pensions law expert Carolyn Saunders said that the consultation was “at odds with the industry’s more general drive to encourage individuals to take greater responsibility for their pensions destinies”.

“An enhanced transfer value exercise involves a big investment for an employer: of time, and of money in professional adviser fees. The employer will therefore want to be sure that enough members will take up the transfer offer to justify this time and expense, which can give rise to some tricky conflicts - for example, if the employer remunerates advisers on a results basis,” she said.

“Unfortunately, experience shows that many enhanced transfer value exercises fail to generate the types of savings that employers were anticipating. If, as it seems, the FSA’s proposals will make these exercises even more expensive, then I doubt whether employers will want to go down this route. That would be a shame for those members who could benefit from taking an enhanced transfer.”

The FSA consultation follows an announcement by Pensions Minister Steve Webb that the Government was taking “urgent legal advice” to protect pension scheme members being coerced into “signing away their rightful pension entitlements” through the offering of “dodgy” incentives. Webb told pensions industry executives in October that employers were offering “bribes” to their staff in order to reduce their pensions liabilities, acting against previous warnings he had issued about the practice.