Damian Cooper looks at the importance of tailoring ETVs for pension members.
Enhanced transfer value exercises, or ETVs, made the headlines in July when the UK’s pensions watchdog, the Financial Conduct Authority (FCA), fined a compliance oversight officer £75,000 for failing to ensure that clients were given adequate advice on ETVs and their pensions.
The hefty fine sent a stark warning to the industry: that poor financial advice in regard to the transfer values of pensions, in this case from a defined benefit (DB) to a defined contribution (DC) scheme, will not be tolerated.
The investigation is timely given the increase in ETVs in pension schemes in recent times. Pension advisers can find this option useful to help companies control the financial risks of a DB plan. The FCA is correct in probing how this information is passed on to customers and the quality of the related financial advice that they are given. ETVs, like many pension transactions, can be highly complicated and confusing.
In short, an Enhanced Transfer Value offer is where those responsible for running a DB pension scheme – the sponsor (company) or the trustees – offer members a higher (or enhanced) value than the value that current regulatory standards would place on their accrued benefits, to transfer their benefits out of the DB scheme. The enhancement is the top-up normally paid by the company.
As independent advisers at Acuvest, we recognise that considering an ETV is often a significant decision for members, and, as such, member communications regarding ETVs need to be approached very carefully. Rather than jumping straight into the detailed and complicated information on how ETVs work it is necessary – no, imperative – that we focus at all times on the person who is the recipient of the ETV offer.
ETVs: It’s all about your people
At the end of the day when dealing with a subject as emotive as pensions there is no ignoring that the presentation of the facts or changes in the most relatable and digestible way is key to getting important information across. Many ETV’s unfortunately have had poor take up rates with members because the information members were given was overly complex, written in technical and legal language and did not explain what the implications were for them personally. Our advice is to keep it as tailored to the individual as possible using key insights as to how their personal circumstances may influence their engagement with the offer.
The details matter
Creating an individualised offer for each and every member is also important. The ability to factor the unique circumstances of each member and to use the data to create a fair value for each individual will ultimately allow for clear and simple presentation of the details – ‘What does it mean for you?’.
The alternative approach to the offer is to give people a standard uplift over the regulatory minimum funding standard (MFS) valuation of their benefits which, while common place, in our view is more problematic. In the first instance, this approach may not treat all members in a fair manner, depending on how their benefits were accrued in the DB scheme, or indeed how their Standard Transfer Value was calculated in the first instance. In addition, very few people fully understand the relationship between the benefits that they were expecting and the associated standard transfer value, which makes it difficult for them to evaluate an offer that is calculated using that as a base.
A decision as large as giving up perceived Defined Benefit security for a pension which rely on a Defined Contribution arrangement is a big one. Trust in the employer, balanced and understandable communications and the independence of the financial advice that is being offered are key to helping members understand the choice being offered to them. Mistakes or a perception of unfairness in the offer from poor data or scheme insights run the risk of hindering the ability of the company to successfully communicate its message and reduce the ability of people to consider their options with an open mind.
Supporting people in their decisions
There is no wrong decision a member can take in this process, their decision is entirely voluntary, but poor implementation and communication failings can lead to a lack of engagement by members with the offer or in a worst case scenario, members making a decision without having fully understood the implications of taking up the offer, or deciding not to.
Best practise in running a good ETV exercise is to allow for sufficient time for the member to consider the risks and advantages being presented and UK guidance suggests a period of at least three months. During that time members should receive balanced information on the pros and cons associated with accepting the offer through an appropriate mix of written and face to face communication channels. Members should all be provided with one-to-one independent financial advice, which is paid for by the company but conducted by an independent financial advisor (IFA) that has ideally not been associated with the scheme or the generation of the ETV offer.
Selecting the IFA’s who will provide the confidential one to one individual advice to members is a step which merits time in its own right. The IFA’s experience and interpersonal skills need to be matched against the members with whom they will ultimately meet. Life experience accounts for a lot in these situations and extensive qualifications in complicated financial investments very little.
Taking on an ETV project on behalf of your organisation and doing it well is a major strategic change initiative. Workplace pensions at the worst of times get poor engagement and at the best of times when change is afoot can be met with cynicism, resistance and a degree of fear. Having the right independent advisers on board who have done this before can guide you and your project around the pitfalls.
Please take the time to read our case study here, and contact me for any further information.
Damian is Chief Operating Officer at Acuvest. Email Damian at firstname.lastname@example.org
Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.