UK pension fund trustees will warn savers looking to transfer to a defined contribution (DC) from a defined benefit (DB) pension during the COVID-19 crisis that it will unlikely be in their best long-term interests.
The call follows guidance published today by The Pensions Regulator (TPR), in which trustees are asked to send DB members looking to move retirement funds a letter warning them of the risks during the pandemic and urging them to consider their decisions carefully.
Since 2015 pensions freedoms have given scheme members more flexibility in how they can access their pension pots.
Many have taken advantage of this flexibility and last year £34bn (€38.5bn) was transferred from DB schemes, according to TPR.
But the regulator has warned that with COVID-19 causing market volatility and an uncertainty for businesses and personal finances, pension members could be at risk of making knee-jerk decisions that could affect their pensions.
Charles Counsell, TPR’s chief executive officer, said: “We are determined to do all we can to protect savers’ retirements from the unprecedented impact of COVID-19.
“A decision to transfer a pension pot that’s taken a lifetime to build is a very serious one and we’d urge members to be very, very careful making any transfer decisions at this time.”
He added that the trustees’ warning letters to their pension fund members should also include information on how to get free, impartial guidance available from The Pensions Advisory Service (TPAS).
Pandemic guidance
In today’s guidance, the regulator is calling on trustees to:
- highlight the free, impartial pensions guidance from Pension Wise, including phone appointments and online information;
- encourage members to take regulated advice to understand their retirement options;
- identify increased risks in how a member has decided to access their pension funds and give appropriate warnings of the risks and implications of their chosen option;
- send all DB members requesting a cash equivalent transfer value (CETV) a template letter signed by TPR, the Financial Conduct Authority (FCA) and the Money and Pensions Service, which runs TPAS;
- monitor CETV requests and inform FCA of unusual or concerning patterns, such as spikes or the same adviser across multitude of requests.
Charlotte Jackson, head of pensions operations and consumer protection at the Money and Pensions Service (MaPS), said: “Many people make decisions about their pensions without fully understanding all of the long-term consequences of their choices.”
She said that the fallout from the COVID-19 pandemic is “putting significant additional pressure on people”.
She added: “As hard as it is, we urge people not to make any rushed decisions, and seek impartial guidance or advice about options open to them.”
Vassos Vassou, a professional trustee at Dalriada Trustees, said that most trustees already highlight the risks to members of transferring and provide details of where they can get help with advice.
“Trustees recognise the pang of anxiety associated with members requesting transfers when our own instincts are telling us the transfer may not be in their best interests,” he said, adidng that the additional material the regulator is asking trustees to include in the information provided to members will provide “sense and balance for members before they proceed with what could be a life changing and potentially devastating decision”.
Gregg McClymont, director of policy at The People’s Pension, said: “We are living through a unique moment in recent history, with the economy having been locked down for the greater good, but at heavy financial cost to some individuals and households.
“The move by the regulator is to be welcomed. The problems in the DB to DC transfer advice market are now well known and understood.”
Workplace pension savers
The Pensions and Lifetime Savings Association (PLSA) has also today published a guide to explain what happens to workplace pensions under a range of circumstances brought about by the virus.
The guide mentions that retirement benefits for those with DB pensions are not directly affected by stock market movements resulting from COVID-19 and states that in cases of employer insolvency, DB pensions are protected firstly by having a ring-fenced fund and secondly by the Pension Protection Fund (PPF).
It also confirms that savings in DC schemes are also ring fenced from employers’ assets, and in addition are generally protected against insolvency of the pension provider.
The guide also warns savers to “think very carefully before deciding to stop contributing to your workplace pension”.
“You could miss out on employer and government contributions to your pension, growth to your pot from a future stock market recovery and even death benefits associated with your scheme,” it said.
Julian Mund, PLSA’s CEO, said: “In the majority of cases the best action is to stay the course with your workplace pension. Past experience suggests that share and other asset prices will recover over time.
“For people in a defined contribution scheme who are close to retirement, it may be necessary to take stock of when you plan to retire and how much income you can expect to have. Seek guidance or financial advice if you are unsure what to do.”
Click here to read the full PLSA guide.
Scams
In TPR’s guidance, the regulator said “pension scams are devastating”, quoting recent figures that show victims of pension frauds have lost on average £82,000, for some their entire life savings.
“Trustees are the first line of defence in protecting retirement funds and have a key role in ensuring members make informed choices,” it said.
TPR is, therefore, also urging trustees to follow the Pension Scams Industry Group code of good practice, which has practical steps for carrying out due diligence and assessing transfer requests and example letters for communicating with members throughout the transfer process.
Additionally, the regulator said trustees should direct their savers to the ScamSmart website, which is monitored by the FCA, to learn how to protect themselves from pensions scams.
The Investment Association (IA) is also warning savers of the potential risks posed to their savings and investments from scams and financial crime during the COVID-19 pandemic.
The association said that “evidence suggests that some scammers are attempting to use the pandemic to convince savers and investors to withdraw money from their investments”.
Chris Cummings, IA’s CEO, said: “Sadly, criminals never miss a trick, and so during this time of heightened criminal activity, we are urging savers and investors to think very carefully about the risks criminals pose to their financial wellbeing and life-long savings.
“If it looks too good to be true, it probably is.”
