Member Transfers Weigh on British Pensions

British defined benefit pensions are shouldering higher costs from members seeking to transfer out of schemes.

According to a new survey by the U.K.’s Association of Consulting Actuaries, 47 percent of plan sponsors have received transfer requests from more than five percent of their scheme’s membership. A third of these schemes have received transfer requests from more than one in ten members.

The group polled 182 sponsoring employers of defined benefit schemes between June and August. In a statement accompanying the report, the ACA said that the flurry of inquiries has been driven by low interest rates in the U.K.

Based on how schemes calculate pension benefits, the transfer value — or the value attached to an individual member’s benefits at the time of a transfer —  is higher when interest rates are low. Still, ACA chairman Bob Scott warned that comparing a defined benefit pension to “uncertain” post-transfer investment returns and income choices is “fiendshly complex.”

“DB pensions are complex and varied and their value is not well understood,” he said.

The higher level of transfer requests has translated to higher administration expenses for plan sponsors, adding as much as 20 percent to the cost of running schemes, according to the ACA survey.

Speaking to Institutional Investor, Paul Cuff, co-chief executive officer of investment consultant Xafinity, said the increased administration burden was understandable, given the work involved.

“If somebody writes in requesting a transfer value, then a calculation needs to be run for that member, individually, based on their individual data and a complicated actuarial calculation is done,” he explained.

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Heightened interest in defined benefit fund transfers has resulted in the U.K.’s Financial Conduct Authority reviewing the phenomenon, amid concerns that some individuals are losing out on retirement savings. In the U.K., transfers from defined benefit schemes have to be conducted after consultation with a qualified financial adviser, but the FCA has found evidence that some individuals had received “unsuitable” advice, and that some pensions had been transferred to unsuitable alternatives.

“There are concerns about both the availability and appropriateness of the regulated advice available to DB scheme members,” Scott said. “Where IFAs [Indepedent Financial Advisers] are providing advice, the questions they pose during the transfer process are varied and time consuming.”

The FCA confirmed earlier this month that the number of individuals switching out of DB schemes had “significantly grown” during the past year. Cuff acknowledged that transfer request levels over the past six to 12 months are “beyond what used to be normal” but stressed that scheme members have a statutory right to ask for a transfer value every year.