Goldie Locks and the three transfer values…
Goldie has a rethink
Goldie Locks looked back on her time as Chief Tasting Officer with the Three Bears Cereal Company with a great deal of affection. She would sometimes wonder whether running out on the job had really been the right thing to do. While the pay had been a bit better at the new place, she realised, with hindsight that the final salary pension scheme at Three Bears really had been very generous.
The pensions she’d built up since certainly looked pretty poor compared to her statement of benefits from the scheme trustees.
Indeed she had always been told that the best thing to do was to leave her benefits and wait for the pension to start paying out. But Goldie had been reading all about these new pension freedoms. She quite liked the idea of being able to take control of her money and wondered just how much her old pension was worth in cash terms. So she decided to ask the trustees for a transfer value.
Over at the Three Bears Cereal Company…
Goldie was not the only past employee asking questions about their deferred benefits. In the past, the perceived wisdom at Three Bears was that transfers out were a good thing – a cheaper way of offloading liabilities. So how should the company react to these requests and what did they need to consider?
Transfer too cold?
The temptation might be to set transfer values at a relatively low level to protect the funding position of the scheme. After all, the new rules were a game-changer for members and there might be all sorts of reasons for them to take a transfer now – greater flexibility, ill health, no spouse – and with gilt yields at their current low levels, transfer values being offered today may prove to be exceptionally high if interest rates were to move back to more ‘normal’ levels in the future.
But…set the transfer values too low and the Three Bears might find their former employees have rather lost their appetite.
Transfer too hot?
So perhaps the answer might be to set transfer values at a higher level to inspire members to transfer out.
Three Bears could even consider topping up transfer values paid out to allow members to remove their liability from the scheme. Such a top up can represent excellent value when compared with the cost of funding the benefits on an ongoing or an eventual buy-out basis.
Indeed this could well mean that more members could transfer out. As long as they were careful, everyone could get their happy ever after.
But what if market conditions do return to something akin to historical norms? Might the Three Bears board look back in a few years and cringe at their generosity and the hole burned in their pension pocket?
Faced with this dilemma the Three Bears board decided the best thing to do was bring in an outside expert – a new Chef, if you like, to help them agree the ingredients for their transfer values and serve them at the perfect temperature.
Once they’d got a calculation basis that reflected their needs and was acceptable to the trustees, Three Bears were able to manage their liabilities with transfer values playing an important part in this. Their new ‘Just right’ strategy included:
- Flexible Retirement options – to give members the full range of options at the point of retirement as part of the standard retirement process, including the transfer value option
- Early retirement exercises – offering those members over age 55 the opportunity to take advantage of the new flexible retirement regime by promoting the options, including transfer options and alternatives available to them.
- Enhanced Transfer value exercise – to all deferred members to remove liabilities in a cost effective manner.
- Small pensions exercise to remove small liabilities for pensioners and those over 55
- Pensioner Increase Exchange exercise (PIE) – to manage the pensioner liability.
The moral of the story
The new freedoms are just another twist in the tale for employers and trustees but an important one that should not be overlooked. For employers who want to be smarter than the average bear, now is the time to bring in some expertise to help get their transfer value policy right: fair for members and the scheme alike.