Should they stay or should they go now?
05 Apr 2017 - Estimated reading time: 2 minutes
If they go there will be trouble and if they stay it will be double.
For those of you who read my first blog on DB to DC transfers, don’t worry, they won’t all be loosely based on the same Clash pun. But I wanted to revisit this topic to explore the perspectives of those looking after or footing the bill for the members left behind: namely the trustees and sponsors.
If they go there will be trouble
Surely if the members go, the sponsors don’t need to worry about them anymore? So what’s the trouble? Well for a start there is some room to game the system. Transfer values are priced on the average member. For example, they assume a probability of members having a spouse, but very few people are actually 80% married (I’m still yet to meet one). If a member doesn’t have a spouse, their transfer value will be overpriced by the value that imaginary spouse adds (and no, you’re not allowed more than one imaginary spouse I’m afraid). Similarly, transfer values assume normal health, but unfortunately not everyone is so lucky to have good health as they approach retirement. If members are knowledgeable enough, and want to play the system, schemes can potentially lose out by paying more than the transferring member’s “fair share” given their specific set of circumstances.
What then of the argument that transfer values are currently overpriced? Expected future asset returns remain near all-time lows, which has pushed up the expected cost of providing DB pensions and in turn transfer values. Whilst that may be true, it’s important to note that transfer values are priced relative to scheme assets. Transfer values may be high, but then so are the assets backing that transfer value. And even though transfer values may be high, typically they are lower than the amount the scheme is funding for. So if a member does decide to transfer out, the pound amount of deficit decreases. Which leads me to the other side of the coin….
If they stay it will be double
Members staying in the scheme are expected to cost more in the long term and contribute towards the total pension risk; the aforementioned trouble. But that’s not where the trouble stops. It’s crucial that members don’t just stay in their scheme because it’s the status quo or because trustees have decided it’s best for them. There’s a growing worry that this approach could lead to complaints or class action in the future.
Whether a member should stay or go will come down to their personal circumstances and feelings. Pink Floyd may have said we don’t need no education, but 40 years on those who were just entering their working lives now do need education to make the choice that suits them best. Whether you are a sponsor or a trustee, you should very seriously consider offering this to them. It’s about giving your employees or members what they value, protecting them from scammers, and helping them make informed choices. Those who leave might just reduce your deficit in the process. But all in all we’d expect the majority to make an informed choice to stay; happy remaining another brick in the big old DB wall.
On 3 May we're hosting a joint webinar with Pinsent Masons, LV= and ITS Limited to discuss how you can help support your DB members in making good retirement choices.