In the last two years, around 200,000 people have exchanged their rights under a defined benefit pension scheme for a lump sum to be transferred into a personal pension or drawdown account. But while such transfers will be the right answer for some, other employees may be seduced into making poor choices by the large cash sum on offer. What can employers do to help protect their staff against this risk?
Fundamentally, the decision as to whether to transfer is a purely individual one. For each person, it will depend on factors such as what other pension rights they have built up, whether they have dependants, what their attitude to risk is, whether they are in good health and so forth. For this reason, it is a legal requirement to take financial advice before making a transfer worth more than £30,000. A qualified adviser will be able to judge whether the person’s best interests are served by staying put – which will usually be the case – or by transferring.
Many employers will feel they want to stay as far away as possible from this issue, not least for fear of being sued if they could later be seen to have influenced the choice and that choice did not turn out well. But I believe employers do have a role to play, especially if they are the sponsoring employer of the pension scheme in question, and also if they care about the wellbeing of their staff.
What can often happen in a workplace is that, once one person has exercised their right to transfer, they discuss this with their colleagues and others start to make inquiries. Before long, everyone is talking about it and it can almost become the norm to consider transferring out of the company pension scheme. Against this background, employers should consider two issues.
First, businesses may want to be vigilant for outsiders seeking to stoke up demand for transfers. The notorious case of the British Steel Pension Scheme was characterised by unregulated introducers telling scheme members that to transfer was ‘a no brainer’ – in flagrant breach of the Financial Conduct Authority (FCA) rules. If it becomes apparent that workers are being targeted, employers can reasonably remind workers of the rules and regulations around transfers, including reference to the relevant section of the FCA website.
Second, if there is likely to be significant interest in transfers, employers may wish to think about helping staff access high-quality, impartial financial advice. This could be done in partnership with the trustees of the pension scheme in question. In my view, one of the reasons the British Steel case went so wrong was that large numbers of workers had to make complex pension choices and were only offered a telephone ‘guidance’ line that could not give them the answers they wanted. Companies can offer up to £500 towards the cost of financial advice as a tax-free benefit-in-kind and could also consider identifying a shortlist of reputable advice firms that employees are able to consult.
While employers should not be giving advice about pension transfers, they do have a duty of care to their employees, especially where they are the sponsors of the pension scheme in question. Flagging the need to steer clear of unregulated introducers and helping to facilitate access to high-quality impartial advice would both be hallmarks of a good employer.
Steve Webb is director of policy at Royal London and a former pensions minister. His guide to the pros and cons of pension transfers can be downloaded at royallondon.com/goodwithyourmoney