The recent stock market sell-off caused by the COVID-19 virus has created unwanted consequences for pension trustees. In particular, those who administer and run Defined Benefit or DB pension schemes are facing unique challenges and are having to reassess how they operate in these difficult times.
Administrative challenges
People who are in lockdown and need to either send mail or scan documents to pension trustees and providers need workable solutions if, for example, they are in a high-risk category or simply don’t own a printer/scanner at home.
Thankfully, most trustees and pension administration specialists already have systems in place whereby transactions can be completed using online secure verification tools, scans and encrypted emails. Those who have previously insisted on ‘wet’ signatures before processing documents have had to rethink their modus operandi.
Whilst the outbreak of the virus is nothing less than a global disaster, it has forced companies to change their ways and catch up with the modern world. It could be argued that traditional postal services are no more secure than online alternatives, and in many cases, far less safe than technological solutions.
Many International SIPP and QROPS providers have also had to change the way they do business. Some were already fully online and can complete transfers without the need for anything to be sent via post. The rest are scrambling to get up to speed and invest in robust online systems and communication methods. It's a pity it had to take a global pandemic to force long-overdue changes which are much to the benefit of customers and advisers alike!
As ever, it’s vitally important to protect yourself from financial scams. It should be noted, however, that the traditional post doesn’t provide any more security than online communication systems.
Testing times for DB pension scheme funding levels
The Pensions Regulator (TPR) has had to review many of the legal requirements trustees operate under. The stock market correction has put DB schemes under renewed pressure regarding ‘funding levels’. Essentially, the funding level of a DB scheme is an estimate of the value of assets against current and future liabilities. It’s expressed as a percentage whereby if a scheme has a 100% funding level, the assets exactly match liabilities.
The funding level of schemes with a high exposure to equities will suffer as asset values reduce. To help trustees manage this situation, TPR has allowed schemes to delay new transfers by up to 3 months without contravening any statutory requirements. This may be extended, depending on how COVID-19 progresses. One of the new guidelines states that trustees are no longer legally obligated to provide Cash Equivalent Transfer Values (CETV's) within the current time limit and can defer to a later date. It’s important to note that delaying the process is only an option and that trustees of well-funded schemes are unlikely to implement it.
Suspension of DB pension scheme employer contributions
Pension trustees are bound by several other statutory requirements, including the timely production of annual benefit statements, investment governance and ensuring employer contributions are made at the agreed rate.
In normal times, most companies comply with all requirements. However, in circumstances where cash flows are under pressure, they may be unable to meet their contribution obligations. Companies are usually only allowed to suspend contributions when they experience severe financial difficulties. TPR has allowed some latitude in the short-term; pension trustees won’t be held liable as long as there’s a good reason for the company’s actions. If, for example, making pension contributions would tip a company into insolvency, the trustees would be allowed to sanction a delay.
Impact on DB pension scheme transfers
What does this all mean to those who are in the process of transferring their DB pension scheme or are considering the pros and cons of doing so?
If a pension transfer is ‘in process’, it’s highly unlikely the trustees would delay or stop it going ahead. People in this position should check with the administration team responsible for transacting the transfer.
Transferring a DB pension is a lengthy process and requires the services of suitably qualified advisers. Anyone who has a DB scheme with a CETV above £30,000 is legally obliged to take financial advice from a pension transfer specialist. The specialist will provide a comprehensive report which explains the difference between a person’s current scheme and a proposed alternative. This process is highly time-consuming and can be quite expensive.
DB pension scheme transfer fees
Fees range from £2,500 to £15,000 and are payable upfront. Generally, most people are happy to pay, as the information provided in the report is a valuable resource with which to decide whether to transfer or not.
It is a fact, however, that some people have already made up their minds to go ahead before the report is produced. For anyone in this situation, additional checks should be made before committing to the fee, as their scheme may be one which is unable to pay the transfer value due to the trustees deciding to delay payments.
Summary
The first step in the transfer process is to contact the scheme trustees and ask for their current position regarding the production of CETV's. The trustees will let you know if they are delaying payments and the funding level of the scheme. It may still be difficult to obtain information regarding the funding level, as this information is only produced once a year. It is important, therefore, to request an up-to-date statement.
It is recommended that you contact a financial adviser to have an initial discussion about your situation. Thereafter, you should have sufficient information to decide whether to take the matter further or not. Finally, if you are reviewing your pension planning, you should consider your overall financial position as well. A well-crafted financial plan should ensure all individual elements work in context with each other.