Trustees – is all or nothing appropriate?
You may be aware of the recent publicity regarding Ford’s decision to offer members of its defined benefit (DB) scheme the right to transfer part of their benefits from the scheme (so called “partial transfer”). Up to now partial transfers have been offered sparingly by trustees of DB schemes with a small number giving members this option. Most trustees have tended to stick with the old fashioned approach of ‘all or nothing!”
With the introduction of pension freedoms, the demand from members for greater flexibility has increased dramatically. Trustees, on the other hand, have a duty to act in ALL members best interests (emphasis on all).
Partial DB transfers have the potential (where applied appropriately) to offer the best of both worlds to members as it gives members the chance to mix and match the flexibilities of Defined Contribution (DC) arrangements with the (generally) greater certainty and predictability of DB.
A number of the previously perceived barriers to offering partial transfers are no longer as relevant mainly due to the increased functionality offered by administration systems which can produce partial transfer calculation at the push of a button.
Introducing this option could be advantageous to trustees, members and the sponsoring employer:
Employer – management of liabilities and reduction of overall scheme size;
Members – added flexibility to deliver optimal retirement outcomes;
Trustees – more security for remaining members, the ability to offer a flexible approach which suits the entire membership. The polarised status quo will always leave winners and losers.
However as a Trustee decisions are very rarely simple, you must consider:
- How flexible do you want to be? In the Ford example they offer 50/50. Is this enough? If not, how hard is it to implement and manage something more complex;
- Do the Rules allow this? Rules are often 20/30 years old, assuming you can do something because someone else does is a dangerous game. If you fail to get this right you may have to reinstate benefits upon challenge.
- How will this impact administration costs? This may require coding changes to supplier systems, the account of split movements will throw off auditors (what do you mean someone transferred but didn’t leave the scheme?). Although as a side note if your provider is on a legacy system that cannot handle change, should they still be your provider?
- How will the transfer be tranched? You cannot split Guaranteed Minimum Pension (GMP) so it may be hard to offer a simple down the line split.
- What about the Pension Protection Fund? You will want to ensure you don’t leave the member with a split of pension that doesn’t disadvantage them on PPF entry. If you offer flexible tranching this could be possible.
- How do you communicate this? The beauty of final salary is its simplicity. Pension or pension plus tax free cash (Pension Commencement Lump Sum if you want to be pedantic but let’s be fair it is just cash that is tax free!) being standard. More choice requires better communication as changes without proper communication will just be a waste of time, energy and of course money. Although as another side note, good communication shouldn’t just follow change.
As Trustees you should be considering:
- What is in the best interest of your membership?
- If partial transfers will add value to your scheme, is it possible?
- If it is not possible, is it worthwhile making a change to facilitate?
- If you decide to do it, how do you implement?
- If you implement, how do you communicate?
The world changes, as a Trustee you have the same responsibility to all members. Therefore instinctively you should be an advocate for flexibility to ensure you meet the needs of as many members as possible. There are challenges as outlined above, however these are not insurmountable with a well functioning trustee board and a good set of advisers and administrators.