Head to head: A question of ETVs
Pensions minister Steve Webb says enhanced transfer value exercises are never in employees’ interests. Is this a fair statement?
The default position is they are usually bad. My starting point is, why is the employer offering them? They are offering them in order to get some liabilities off
the books and what they are trying to do is gain something from the exercise, which means as someone who is offered an ETV, you are losing out.
There are situations where people can benefit from the offer depending on their personal circumstances, such as if someone is single, they may be able to take a transfer value which includes a spouse’s pension provision and buy a higher single life income. Another situation is if someone is in ill-health and can benefit by buying an enhanced annuity or potentially if someone was considering transferring out of their final salary anyway and going into drawdown, particularly with the new option of flexible drawdown, the ETV could provide them with the push to do so.
There are circumstances where people can benefit from them but they are relatively limited and the starting point should be one of scepticism.
There are circumstances where people can benefit from them but they are relatively limited and the starting point should be one of scepticismited and the starting point should be one of scepticism.
The most important thing is members should always seek financial advice because there are a lot of complex and important issues surrounding the decision.
Getting advice gives you an analysis of life expectancy, future interest rates and investment returns and tells you what you would need in terms of an investment return to produce the same outcome as a final-salary scheme.
The solvency of the employer is another difficult issue to take account of. If you are under the PPF cap, it is not such an issue but if you are above the PPF cap, it can be quite scary if your employer is about to go bust. The difficulty is in assessing the solvency or your employer or ex-employer.
It all depends on how ETV exercises are conducted. I do not think there should be a prohibition on ETVs but they should be done in a proper manner that gives people fair information so they can make an informed decision with their adviser.
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 misselling, 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 One of the concerns raised around ETVs has been about the use of cash and whether scheme members may be lured by ’superficially attractive’ deals of 31 per cent where members had a cash option and 20 per cent where they did not.
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.
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.
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.