Would giving savers information about pension transfers open Pandora’s box?

By Michael Klimes

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Oct 02, 2018
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Michael Klimes asks if trustees who provide information to members about transfers would cause more problems than it solves

Industry debates where to draw the line between impartial information and a pro-transfer nudge

A new paper calling for employees to be given information on how to access transfer values even if they have not asked for it has reignited the debate about best practice on defined benefit pension transfers.

Many advisers argue pension freedoms have created a set of issues that cannot be reversed and trustees should assist them through facilitating partial transfers or financial planning advice, for example.

Trustees often rebut this and say facilitating more transfer information would be like opening Pandora’s box all over again. They point out angry members who believe they have had bad advice will take them to court. They also say scheme rules are often written in such a way that they do not allow trustees to provide financial guidance or education to members.

Furthermore, there are concerns about who pays for the financial advice as that is usually at the discretion of the employer and not the trustees. Last week, Royal London published a discussion paper with pension lawyers Eversheds Sutherland to find a path through this difficult terrain.

It aims to help trustees understand both what the law requires of them and what good practice might look like.

The paper calls on trustees to make members aware that transfer values are available on request as part of routine communications, regardless of whether members have asked for information on getting them.

Royal London notes members “don’t know what they don’t know” so need support on all the options available from trustees.

The paper points out that explaining options legitimately open to a member, with appropriate risk warnings, is not the same as steering the individual in a particular direction, which trustees should be careful not to do.

It adds: “The Pensions Regulator’s guidance does not rule out or actively discourage the inclusion of a transfer value – or referring to its availability – in member communications.

“In fact it refers specifically to just this scenario and says ‘trustees can support members in a number of ways to ensure they have the information they need to make a fully informed decision’.”

Therefore, trustees should not present information on transfer value availability as either pro- or anti-transfer but just make it available. Eversheds Sutherland partner and head of pensions Francois Barker says current practice by DB trustees varies hugely and they should consider their approach in the round, including facilitating independent financial advice for members.

But could putting the potential for a transfer value in front of members who do not ask for one lead to a new wave of transfers?

Legal nuances

Arc Pensions Law partner Rosalind Connor finds the key point – members “don’t know what they don’t know” so need support on all the options available – a compelling one as many are unaware of their rights to transfer out, or even that they can obtain a transfer value.

However, she warns there is a flip side to this as there are a lot of concerns among trustees about members transferring out without proper understanding.

She says: “There is the obvious risk of pension liberation scams, but there is also a risk of members transferring out because it is a good idea at the time, but then regretting it.

“No one can certainly know what their future needs might be and for some members a transfer out will, with hindsight, not have been the most appropriate decision.”

The danger of members becoming emotional after making a decision that led to unfortunate outcomes and then blaming trustees for it is probably in the back of many trustees’ minds.

The reticence about transfers is one advisers share and explains why some of them have recently pulled out of the market, as dealing with clients who want their money regardless of suitability is too much hassle.

Unfortunately for trustees, the paper also says they might potentially face a legal challenge if they fail to equip members to make well-informed choices, especially where a transfer out might have been to their advantage.

It says the risk for a member who reaches a suboptimal decision in circumstances where trustees choose not to provide transfer value information proactively might challenge whether the trustees have properly met their fiduciary duties.

The paper adds that some support for this approach can be gleaned from a number of Pensions Ombudsman decisions over the summer.

The Ombudsman said that the trustees “had a fiduciary duty to provide [the client] with the relevant information to enable him to make a fully informed decision about his options”.

It concluded it would have resulted in the member accessing his benefits during his lifetime to avoid severely disadvantaging his widow.

In another case, where a member transferred out of a DB plan into a scam defined contribution vehicle, the Ombudsman said that the authority responsible for their pension was at fault. This was because it failed to “alert him to the possible risks associated with the proposed transfer” and should have done more.

The paper notes these are not the last word on transfers and adds: “These cases, of course, all turn on their precise facts.

“And it might be too bold to conclude that these determinations support the proposition that transfer value figures should automatically be provided to all members in the run-up to retirement.

“But, echoing the Pensions Ombudsman, one might at least argue that, for many members, a flag in pre-retirement communications that a transfer value is available is the sort of salient information that would help them to make an informed decision.”

For Arc’s Connor, the dilemma of what trustees should do on transfers is very difficult to answer definitively as it depends on numerous inter-related circumstances.

She says: “There is probably a wider question – is there a non-legal obligation to ensure members understand their options? What if this means more members take a transfer and later regret it?

“The Royal London argument is that it is up to the member and it is not fair that they do not know, but some trustees would see no reason to communicate options to members unless they are sure that those are in the members’ interests.”

Trustees take charge

Association of Member Nominated Trustees chairman David Weeks says the anecdotal evidence is members of the industry group view transfers as a difficult topic.

He says: “Trustees do support the pension freedoms but also want to help members make the best use of them and the most effective way of doing that is where the discussion seems to be now.

“Many trustee boards hope an eventual court ruling will establish and demonstrate the finer points of the law in somebody else’s case rather than their own.

“My own personal view and not the in-house AMNT view is that trustee boards would like to be paternalistic towards members but it can be expressed in one of three ways.”

There is the minimalist approach where trustees wait for members to approach them and then provide neutral information about transfers.

The second and slightly more proactive step is trustees approach members and present the available options on transfers.

The third and final approach is interventionist, where trustee boards select a group of designated advisers to help members with transfers.

Weeks says: “The trend right now seems to be that trustees want to do a bit more rather than a bit less, but the interventionist approach is a minority view mainly due to cost.”

Whatever schemes are currently doing, Royal London director of policy Steve Webb is adamant trustees can no longer sit on the fence when it comes to transfers.

He says: “Hundreds of thousands of people have transferred out of their company pension in the past few years, having taken impartial financial advice.

“In my view, trustees need to engage fully in this process and not make assumptions about what is right for individual members.

“Instead they should make sure that their members are well-informed about their options and are equipped to draw on good-quality advice before making a decision that is right for them.”


DB transfers: In numbers

£8.2bn Pension transfers in the second quarter of 2018

10 Firms that advised on British Steel Pension Scheme transfers that have lost their regulatory permissions

2 BSPS firms that have gone into liquidation

£370k Compensation paid out by the Financial Services Compensation Scheme so far

3,000 Advisers to be asked for data in the next round of the FCA’s suitability work



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