Resist the temptation to transfer your pension

published 7 September 2018

912_MW_P23_Pensions — The members left behind may have to settle for something smaller

Final-salary pensions have been too generous to those leaving the schemes.

Overly generous transfer payments to savers leaving defined-benefit (DB) pension schemes could jeopardise the pensions of those remaining, according to the Pensions Regulator. The intervention could force all such pension schemes to reconsider how much they offer people taking their pension rights elsewhere.

Savers have transferred some £21bn out of DB schemes over the past year in the face of conventional financial wisdom that it is rarely sensible to give up the guaranteed pensions such plans offer, since this certainty is unlikely to be available in alternative arrangements.

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Record high transfer values

In many cases, people have decided to move their money after being offered very generous assessments of what their accrued pension rights are worth. Schemes offer "cash equivalent" transfer values on the basis of factors such as interest rates, but also have some discretion; with many sponsoring employers keen to get pension liabilities off their books, transfer values have been running at record highs.

Until now, regulators have focused on the position of savers accepting transfer offers, amid anxiety that even with the enhanced transfer value they may end up worse off in retirement. Now, however, the Pensions Regulator is arguing that overpaying those leaving the scheme may diminish its assets to such an extent that it may be difficult to fund the pensions of those who stay put.

The regulator has written to 14 pension schemes asking them to review the size of the transfer values they have been paying. The schemes have not been named, though it is understood that they are all cases where the regulator has some concerns about the finances of the sponsoring employer.

However, while schemes funded by financially weaker employers might find it particularly difficult to plug the gap if generous transfer values do prove to have undermined scheme finances, the regulator's warnings will give all DB pension schemes pause for thought. Advisers to such schemes say their boards of trustees the officials legally responsible for safeguarding members' interests will now need at least to review their policies on transfer values.

Some advisers have reported that schemes are already beginning to reduce transfer-value offers in the light of the Pensions Regulator's intervention. While that will disappoint savers tempted to transfer, it is still true that for most people moving money out of a DB scheme is not the best financial move.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.