The Pensions Regulator (TPR) has published guidance for savers looking to transfer from a defined benefit (DB) to a defined contribution (DC) pension scheme during the coronavirus pandemic.
It has warned people that it is “unlikely to be in their best long-term interests to carry out a DB transfer”, as it is impossible for trustees of pension schemes to be sure of the underlying value of the pension funds, or each individual’s share.
This decision comes several weeks after the TPR urged UK pension schemes to delay processing defined DB transfer requests for up to three months.
In March 2020, former pensions minister Baroness Ros Altmann added that all pension transfers should be on hold for around six months amid the financial instability being caused by the covid-19 pandemic.
Since 2015, pensions freedoms have given scheme members more flexibility in how they can access their pension.
Many have taken advantage of this flexibility and last year £34bn ($42bn, €39bn) was transferred from DB schemes.
Ian Browne, pensions expert at Quilter, said: “The new guidance for trustees to warn DB members of the risks of transferring during the pandemic is welcome, as it is vital that pension savers do not do anything drastic with their nest egg and consider the options available to them very carefully.
“The sudden change in the economic landscape has created an environment which could tempt many DB pension holders to transfer to a DC pension.
“The fluctuations in bond yields and investment markets has increased potential transfer values, and many will be tempted by the opportunity to invest their retirement pot in a depressed market.
“But the economic outlook is still extremely uncertain, and the relatively high transfer values should not be an automatic reason for a member transferring out.
“The guaranteed income from a defined benefit scheme should not be downplayed and a transfer will only be in a members best interest in the minority of cases.”
The TPR is calling on trustees to:
- highlight the free, impartial pensions guidance from Pension Wise, including phone appointments and online information;
- encourage members to take regulated advice to understand their retirement options;
- identify increased risks in how a member has decided to access their pension funds and give appropriate warnings of the risks and implications of their chosen option;
- send all DB members requesting a cash equivalent transfer value (CETV) a template letter signed by TPR, the Financial Conduct Authority (FCA) and the Money and Pensions Service, which runs The Pensions Advisory Service; and
- monitor CETV requests and inform FCA of unusual or concerning patterns, such as spikes or the same adviser across multitude of requests.
Charles Counsell, TPR’s chief executive, said: “We are determined to do all we can to protect savers’ retirements from the unprecedented impact of covid-19.
“A decision to transfer a pension pot that’s taken a lifetime to build is a very serious one and we’d urge members to be very, very careful making any transfer decisions at this time.
“That’s why for the foreseeable future, anyone who is looking to transfer their benefits out of their DB scheme should be sent a new warning letter to make them stop and think as well as point them towards free, impartial guidance available from The Pensions Advisory Service.”
The regulator also discussed the issue of pension scams and said that the most recent figures show that victims of pension frauds lost on average £82,000.
“Trustees are the first line of defence in protecting retirement funds and have a key role in ensuring members make informed choices,” the TPR said.
“To guard against scammers, TPR urges trustees to follow the Pension Scams Industry Group code of good practice.”
The code looks at carrying out due diligence and assessing transfer requests, as well as how to communicate with members throughout the transfer process.
On their guard
Commenting on the fraud warning; Kate Smith, head of pensions at Aegon, said: “As financial services providers, we’re aware of the role we need to play to help support people through the crisis.
“As part of that remit, we want to encourage savers to make good decisions, minimise the risks they take and ultimately help people avoid falling victim to scammers.
“The climate we find ourselves in unfortunately is perfect for fraudsters, intent on preying on people’s anxieties and encouraging them to make decisions they wouldn’t normally.
“It’s ever more important to be vigilant to keep pensions safe, and for providers, advisers and guidance services to support pension savers to continue to make the right decisions and to help people protect themselves from fraud.
“More than ever, people should be on their guard, pause and not rush into any decisions.”