Pension scheme trustees should actively engage financial advisers if members are looking to transfer out of their defined benefit arrangements and washing their hands of the process does not eliminate risk, a study has found.
Pensions lawyers Eversheds Sutherland and mutual insurer Royal London looked at pension trustees’ approach to engaging advisers in defined benefit (DB) transfers since the introduction of pensions freedom.
Financial Conduct Authority (FCA) figures show from April 2015 to September 2018 some 230,0000 DB pension scheme members were advised on transfers, with an average transfer value of £350,000.
Trustees may show a reluctance to step in due to their potential liability if something goes awry, but evidence has shown there is a need to help members gain access to high quality advice, the research found.
British Steel’s pensions debacle illustrated why trustees should help its members gain access to high-quality advice and doing nothing does not limit risk, according to Eversheds Sutherland partner and head of pensions Francois Barker.
“When it comes to trustees and pension transfers, there is no ‘risk-free’ response. The British Steel case demonstrates the reputational damage which can be done when members are left to find their own sources of advice,” Barker said.
“Trustees who engage with the issue in a properly governed way may well be less exposed than those who do nothing at all.”
The research report sets out guidelines for pension trustees on how to approach DB transfers, from minimal involvement to the “gold standard” of appointing nominated IFAs.
Tesco’s pension scheme, which plans to appoint two carefully selected advice firms for members considering DB transfers, was used as an example of good practice in the research.
As well as providing its workers with access to fixed-fee transfer advice, the supermarket giant is supplementing this with ongoing oversight of the firms’ performance, with the option to replace them if they are not delivering.
Tesco PLC Pension Scheme chair Ruston Smith stressed the importance of engaging the right advisers to assist with DB transfers.
“In the last few years, there have been some examples where groups of employees or members haven’t had the right outcomes from the independent financial advice they received. There are therefore real benefits of appointing an IFA panel to support members in getting the advice they need and to reduce or remove the likelihood of scams,” he said.
While the guidelines do not provide a “one-size-fits-all solution”, they were designed to help trustees judge the appropriate level of involvement in supporting its members.
Royal London director of policy Steve Webb said: “Despite all of the controversy around this issue, it remains the case that transferring out of a DB pension will be the right answer for some people in some circumstances. There is much to be said for trustees helping members to access high quality, affordable financial advice to help them to decide if such a transfer is right for them.”