Mike Morrison: Want a healthy debate? Serve up DB transfers

The one pension topic guaranteed to create a healthy discussion is that of defined benefit (DB) transfers. A combination of pension freedoms, lower interest rates and tax-efficient death benefits have concentrated the mind and overall there really does seem to be a mood for change and clarity in this area – not least a review of the presumption of unsuitability and of the Transfer Value Analysis System (TVAS).Let’s go back to basic principles – everyone has a right to take a transfer from a DB scheme (but not from public sector schemes) until one year before the normal retirement date of the scheme, after this date it can still be possible but at the trustees’ discretion. Such a transfer would extinguish benefits under the DB scheme.Instead of a full transfer, it is also possible to take a partial transfer from a scheme, if the scheme rules allow. The ability to take a partial transfer has long been used by some schemes but it has never been a mainstream solution. It is usually done by transferring a portion of the Cash Equivalent Transfer Value (CETV) representing a portion of the DB benefits.Why would this be good? Well, for the scheme member, taking a partial transfer can have a positive outcome and can also help in avoiding a very negative result. One of the key considerations in transfer suitability is the strength of the employer covenant. The deficit in a pension scheme is a debt on the employer and therefore the covenant may be weaker for employers that are in financial trouble.As a last resort schemes can be moved into the Pension Protection Fund (PPF). The PPF is the industry ‘lifeboat’ that will guarantee benefits but with a cap, which is reviewed each year. The cap at age 65 is, from 1 April 2016, £37,420.42, which equates to £33,678.38 when the 90 per cent level for those who have not yet retired is applied. Until normal retirement age is reached and benefit comes into payment, the pension level will rise in line with inflation each year, subject to a cap. If a person did not take a partial transfer and instead left a preserved pension in the scheme, it is possible they could lose out if the employer failed, the scheme became subject to the PPF maximum, and the capped amount was lower than their actual benefit.One of the key arguments for a defined contribution/money purchase approach to decumulation has been to put together an income strategy particular to the individual instead of treating them as part of a ‘pool’. The pooled DB approach is okay for accumulation but no further!From a positive perspective, a partial DB transfer can create a ‘blended’ approach to retirement where part of the money is left with the DB scheme, offering a guaranteed portion (similar to an annuity), and the excess is transferred into an income drawdown scheme with an investment strategy pertinent to the client’s needs.A final but more esoteric advantage of a partial transfer is from the perspective of pension planning on divorce. For example the court allocates assets between the parties – a partial transfer post-age 55 creates a cash sum that can easily be used to satisfy a court order, as opposed to having to sell another asset or borrow.One question to consider would be whether a partial transfer would be attractive for sponsoring employers and scheme trustees. There would be some legal work to amend the scheme rules and extra administration for the trustees, however there could well be other benefits:• Losing part of the benefits from the scheme could lower costs. If there is indexation on scheme benefits a lower level of benefit after transfers would need to be indexed.• More unquantifiable would be the de-risking and control of costs for employers and trustees, particularly in the decumulation phase. A lot of scheme trustees do not want to get involved with retirement options for cost and legal liability reasons, however, this approach could allay many of these concerns.The final point must be in relation to the advice process. Would an adviser look more favourably on recommending a partial transfer as opposed to a full one?It would at least help a few more people to enjoy pension freedoms.Mike MorrisonHead of Platform Technical

Mike Morrison: Want a healthy debate? Serve up DB transfers

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