- Over 90,000 defined benefit (“DB”) scheme members have been offered “Enhanced Transfer Values” (“ETVs”) to leave their DB schemes in past three years, with a further 70,000 expected this year, finds KPMG survey
- On average, around one in four members typically accept the offer, with three quarters choosing to leave their pension in their DB scheme
- Market practice appears to be improving with independent financial advice now being offered as standard in virtually all ETV exercises and a number of instances where cash alternatives to pension provision have been restricted
- Extrapolating the historical take up rates across the half of all DB schemes believed to be considering ETVs suggests that as many as 750,000 scheme members may transfer benefits out of DB plans in the next 5-10 years. This could reduce total DB scheme liabilities by as much as 10 percent or £100bn
“Enhanced Transfer Value” (or “ETV”) exercises* have grown increasingly common as a tool for employers to manage their pension risks and their use is set to increase, according to a survey by the Pensions Team at KPMG in the UK.
In what is the first piece of research of its kind, KPMG surveyed ten firms of Independent Financial Advisers (IFAs) engaged in these exercises to review the level of ETV activity to date. The survey finds that 91,200 members of defined benefit schemes have been offered such transfers from 83 pension schemes in the past three years.
Of the 91,200 members offered ETVs in the past three years KPMG’s survey reveals that around one in four members transfers. There have been an estimated 20,000 transfers with an average value of £65,000**.
According to KPMG, the use of ETVs as a risk management tool is set to increase further with potentially 70,000 DB scheme members expected to be offered them in the current year alone.
Half of all DB schemes are believed to be considering an ETV exercise which would translate to over 2.5 million people being offered enhanced transfer values.
Extrapolating the average take up rates of around one quarter revealed in the KPMG survey suggests that a further 750,000 DB scheme members may transfer benefits out of their schemes.
Regulatory concerns and the industry’s response
The Pensions Minister, Steve Webb, warned earlier this year that ETVs have the potential to be mis-sold, and that he wanted to see the examples of bad practice identified by the Pensions Regulator to be stamped out. KPMG’s research indicates that market practices have improved markedly since ETVs first started in 2005/6. For example, there have been no ETV exercises since 2008 identified where the employer has not funded independent financial advice. Further, there have been a number of instances in recent exercises where the cash element of the ETV offer has been restricted.
Mike Smedley, pensions partner at KPMG in the UK, commented: “ETVs have become a key element of many companies’ pensions de-risking strategy and our data indicates that their prevalence is going to increase. The Pensions Regulator and more recently the Pensions Minister have raised concerns about mis-selling, and our survey data suggests that market practice has already responded to some of these concerns. For example, our findings reveal that no exercise since 2008 in our survey has been carried out without the provision of company-funded independent financial advice, although this was more common before then.”
One of the specific concerns raised around ETVs has been about the use of cash and whether scheme members may be lured by “superficially attractive” deals. The KPMG data shows that take-up rates have been higher when a cash element is included with an average take-up rate of 31% where members had a cash option and 20% where they did not. This suggests that cash has an influence, but it is difficult to isolate the impact of other factors which vary by ETV exercise and hence whether members are making potentially “wrong” decisions. Even where cash is available, one third of members choose to keep all of the enhancement in the pension pot rather than take the cash.
Mike Smedley commented: “Our data indicates that the attraction of cash today*** as opposed to a steady retirement income does influence members’ decisions, although it is difficult to be conclusive. However, the use of cash payments direct to members is changing; a number of recent exercises have had no cash option and others have had strict limits on the maximum amount of cash that could be taken.”
Notes to editors
* An ETV offer is where an employer offers a member of its defined benefit scheme a value greater than the standard transfer value of the member’s “Cash Equivalent Transfer Value” ( a statutory amount that would be paid to a member under prevailing pensions legislation if they wanted to transfer into an alternative pension arrangement) to leave the scheme. In this way, the employer reduces its pension scheme liability and its long term risk exposure.
** Data on the value of the ETV paid was available for 5,811 cases
***Why do members transfer?
The IFAs surveyed were asked to give the five main reasons why a member typically makes a decision to transfer with the chart below revealing the grouped responses
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