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Transfer transition

Transfers, whether backed up by bungs or so-called enhancements, have justifiably earned themselves a bad reputation in the past. Described by some as the “flat-screen TV effect”, unsuspecting deferred members are sent an offer of what to them seems like a generous cheque as well as a measly transfer to a defined-contribution plan.

Some campaigns aimed at offloading liabilities were so reliant on the desperation and short-term outlook of deferred members that advisers would even discuss whether it was more efficient to send out offer letters before Christmas when the desire for spending money is highest or in January when the credit card bills land on the mat.

Now we are seeing a more sophisticated approach being brought to the market. Transfer values are on the up and advisers are more professional in the way they are filtering those scheme members that can benefit from switching out from those who will not.

One of the drivers of this change is the emergence of bulk buyout and buy-in as a way of reducing liabilities. Goldman Sachs will offer transfers to members of the schemes it buys out, with professional advice thrown in to make sure that the process is squeaky clean from their point of view.

The Faculty and Institute of Actuaries recently threw its weight behind the idea of a greater role for transfers and with the new rules on the calculation of transfer valuations set to come in from October, industry professionals are predicting that the practice will pick up even more momentum.

Then there are the genuine reasons why some people are more likely to do well to switch anyway, such as single members whose values include an allowance for dependants, whether they are married or not, those with impaired lives who need to reach a lower target retirement pot to achieve the same return and those after more flexibility over tax-free cash and phased retirement.

In addition to these factors is the valid point that while some schemes have reserved against liabilities, with gilts or corporate bonds returning perhaps 5.5 per cent, transferees can hope to return 7 per cent through equity markets over the long term, however unlikely this might seem right now.

But despite all of these points in favour of switching out, no FTSE 100 company I am aware of is yet to put in place a programme to offer its deferred members enh-anced transfers out of a final-salary scheme. Experts say several are thinking about it but nobody wants to be the first to do it, which is not surprising when you consider the reputation risks.

If things were to go wrong and a misselling case were to gain momentum, an employer could find themselves saddled with a public relations nightmare. Imagine if 5,000 deferred members of the British Airways’ pension scheme had taken transfers a year ago and were now nursing losses of more than 20 per cent on their DC pots. BA might attempt to hide behind the veil of the IFAs who had given the individual advice that had put them in that situation but the chance of a bandwagon of misselling demands rolling into action would be significant.

This unfortunate proposition will be a reality for some unlucky folk who have transferred out in the last couple of years but this has, to date, been from the pension schemes of companies with little attraction to the media and even less to lose from a brand point of view.

One of the solutions to this element of risk is the smarter use of investment funds when people transfer out. Employers will be more attracted to transfer programmes if they know scheme members are likely to end up in less volatile investment funds, particularly the defaults that are factored into the advice given by IFAs on the transfers.

If the losses we have seen in recent months continue, bigger employers will only be enticed into the transfer space if advisers show a proven record of getting the reinvestment story right.

John Greenwood is editor of Corporate Adviser

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