Commenting on the news that the Defined Benefit (DB) scheme of an unnamed financial services group has seen its liabilities cut by a tenth in 6 months due to members cashing in their benefits, Calum Cooper, Head of Trustee DB at Hymans Robertson said:

“We need to be clear that 10% transferring out of a DB scheme doesn’t just equate to a 10% saving or deficit reduction. While the liabilities for this schemes were reduced by 10%, the question is how much did the assets fall? Schemes need to understand the impact this has on those remaining in the scheme, particularly on the chances of success of being able to pay the benefits to the remaining members as they fall due.

“The experience of this scheme is broadly consistent with what we see in our own client base when they undertake a well-communicated bulk transfer exercise with fair terms.”

Discussing what’s happening more broadly in the market, he added:

“Increasingly we’re seeing DB schemes proactively communicate with and support members around the retirement choices now available to them. While this is the right thing to do, more needs to be done. Too many schemes are taking a passive approach both to communicating and supporting members with their decisions which can put both individuals and the schemes at risk.

“In our recent poll of trustees and employers, 88% agreed that schemes could do more to support members. Schemes have a responsibility to ensure choices are communicated properly and can be accessed in a safe and supported environment. If not, we risk seeing a repeat of what is happening with the impaired life annuity market whereby the regulator imposed fines on insurers for not providing ‘sufficient information’ for retirees to make an informed choice.  Although it is still early days, the parallels are clear.

“Many may jump to the conclusion that giving up valuable DB benefits is ‘bad’ for members, and undoubtedly it is for some. While transferring out could be wrong for many, for a significant minority it could make very sound financial sense, particularly if they are in ill-health or don't have a spouse, or they could just have a scheme offering very high transfer values or with a real risk of receiving lower PPF benefits.

“The headlines tend to focus on those that have transferred out. If this or any scheme has a strong communications process backed by high quality advice, then we can have confidence that those who stick with the scheme do so for the right reasons, having understood and explored the alternatives.”

“It’s vital that both trustees and employers do all that they can to ensure DB scheme members make decisions that are right for them. They work hard to safeguard the valuable benefits promised up to the point of retirement; ensuring individuals make the right choice when making one of the biggest financial decisions of their life is a natural extension of these duties. Decisions must be made on an informed basis and with access to quality advice. This isn’t just to protect scheme members, but also schemes. If individuals are unsupported and make poor choices this could come back to bite trustees and employers.”