As austerity bites ever deeper into the economic fabric of the UK during 2012 and in the coming years, forcing employers to examine balance sheets in the minutest of detail in a bid to save on overheads, the role and the responsibilities of the independent trustee and other pensions professionals and lay personnel has never been so starkly in focus. For there’s a lot riding on their expertise, not least in protecting the rights of the pension scheme members they represent. Given the gloomy economic predictions, there are surely some tough times ahead for everyone.
Take transfer incentives, for example, a ploy which many employers will be actively considering given the economic imperatives facing them. Now, there’s nothing wrong with transfer incentives – and nothing remotely illegal or underhanded either in the practice. However, unless handled correctly, and transparently, corners are easily cut, whether by accident or design, all to the detriment of pension scheme members.
The concept of transfer incentives relating to defined benefit schemes, for example, is not an easy one to explain, which is why trustees have a major part to play in outlining all the pros and cons to members so they can make informed decisions. First moves will come from the sponsoring employer looking to unload scheme liabilities and encourage employees to transfer out.
A defined benefit scheme – less common now than they once were because of the financial burden placed on employers – is one where the member receives a set amount each year on retirement. The amount is based either on a final salary or career average and on the number of years paid into the scheme. The scheme will usually offer a range of other benefits such as full pension payments if the member is forced to retire due to ill-health. Nowadays, defined contribution, money-purchase schemes are the norm.
A transfer incentive may take the form of an ‘enhancement’ whereby the employer offers a boost in the transfer value if the member opts for a different scheme. This is probably the most common form of transfer incentive. However, there are others, including the offer of an immediate cash payment in return for agreeing to opt out.
Trustees certainly have to be on their guard because if not handled well they could leave themselves open to complaints by other scheme members at the very least. A worst case scenario could even see them come under scrutiny from the Ombudsman or the Pensions Regulator. One of the best ways to avoid such charges is to actively engage in the process and not sit by passively.
There are a number of clearly set out principles which all trustees should be guided by when dealing with transfer incentives. For example, any offer to members by the employer should be clear, fair and not misleading. The employer should spell out the reasons for any offer made to scheme members. Trustees also need to be watchful of and to handle any conflicts of interest which might arise and they need to be consulted and to actively engage in the process. They must also ensure members receive impartial and independent advice.
