Enhanced Transfer Value Exercises: under scrutiny
Oval’s Simon Chrystal thinks tPR is right to demand tighter guidelines for ‘sweet-spot’ exercises

Did you know?
ETV exercises can be costly at around £1,000 per member1 – so it pays to get your approach right before you proceed.

When a DB scheme is in deficit, employers need to pay a one-off cash lump sum and/or an annual deficit funding contribution over an agreed recovery period. At the same time, many employers are considering other forms of liability management such as Enhanced Transfer Values (ETV). ETVs use employer capital to enhance the total value of the benefit and enable members to transfer out. This cuts the scheme liabilities and in turn reduces the impact of it on the capital structure of the company. So far, so good.

Whose best interests?

However, The Pensions Regulator (tPR) believes too many members are taking the so-called ‘sweet-spot’ transfer plunge too easily. The regulator’s position is clear: that member advisors should take the initial view that these transfers are not naturally in the best interests of the scheme members. Therefore any ETV exercise ought to be tackled with probing and well-informed caution.

Here’s tPR chairman David Norgrove’s recent observation: "Since we published our initial guidance in 2007, we have seen behaviour that concerns us. There has been a box-ticking approach that has led to exercises being run without due consideration to scheme members. As a result we will be looking closely at exercises and working with other regulatory bodies to ensure that standards are improved”. The regulator clearly states they expect that members are able to make more informed decisions. Importantly, he warned that: “The Pensions Ombudsman will take this guidance into account to determine whether any complaint is upheld. He can then direct trustees or employers to compensate members accordingly."

It’s a clear-cut case

Strong stuff. So where does this leave ETV? We say it’s all about good advice and good member consultation. The key objective for employers is to make the total transfer value attractive enough to the members for them to accept the offer.  Trustees may play a part in ensuring that any transfer incentive exercise is appropriately constructed and to ensure it is a close reflection of the original defined benefit promise. And that means rigorous independent advice: the Oval line is clear: if adviser and member perceive no value in transferring, then trustees should not proceed.

We fully back the tPR/FSA guidance2 on fairness and transparency:

• Members must be provided with clear information that is not misleading
• Members must be provided with impartial and independent advice to ensure they make the right decisions
• Trustees must engage in the offer process and apply a high level of scrutiny to all incentive exercises to ensure members' interests are protected
• Employers must ensure that any offers made are consistent with the principles in the guidance
• No pressure of any sort should be placed on members to make a decision to accept the offer

Re-calibrating your pension scheme to minimise your liabilities while securing the benefit is a complex area and it pays to get the right advice – right from the off. If you’re intending to explore ETV, then come and talk to Oval.

1 Matthew Craig, EmployeeBenefits.co.uk, September 2008
2 tPR/FSA Guidance as quoted by ProfessionalPensions.com, 13 July 2010

Like to find out more about how Oval can help you explore ETV with confidence? Contact Simon Chrystal on 07771 611224 or email at: simon.chrystal@theovalgroup.com