On Friday 27th March 2020, The Pensions Regulator published guidance allowing Defined Benefit (DB) schemes to delay transfer requests by up to three months.
Why is there a ‘DB transfer freeze’?
As we are sure you are aware, the stocks markets felt the impact of Coronavirus and have drastically fallen since the pandemic outbreak. The freeze allows trustees more time to calculate transfer values and assess funding in company pension schemes.
The recent market fluctuations have made it more difficult for trustees to be sure of the underlying value of pension funds, so they need more time to calculate cash equivalent transfer values (CETVs).
Similarly, schemes are cautious that an increase in demand for CETV calculations will put a strain on their administration teams. As a result, transfer value requests have fallen down the list of priorities.
According to the financial services provider, Prudential plc, some of the issues schemes are needing to deal with include:
- getting their valuations correct
- ensuring they are getting accurate values for their investments
- assessing any new risks that may materialise
- assessing commutation and/or early retirement factors
- validating previous risk-based decision
- dealing with employers wanting to defer scheme contributions
- assessing the strength of their employer covenant
- potentially increased transfer out requests, etc.
Additionally, freezing DB transfers should prevent individuals from being targeted by scammers and allow schemes to focus on important administrative tasks. Tasks such as ensuring pension payments continue to be paid, processing retirement requests and bereavement claims.
What does this mean for scheme members?
Typically, trustees are required to provide a CETV within three months of the request, after which the member has three months to accept this from the guaranteed date. The transfer must then be processed by the Trustees within three months of the quote expiry, which is effectively six months from the guaranteed date; this process could take up to nine months following the recent announcement.
It’s important to note, the regulator has only provided guidance, it is not legally binding and not all schemes are delaying transfer value requests. There is no ban on DB transfers, and there isn’t a freeze on the right to transfer, this guidance is purely to allow schemes additional time to produce transfer quotes if they need it.
If you are considering the options you have with your DB pension scheme, then you should discuss this with a professional financial planner with the appropriate authorisation.