Here’s why you need to consider an Enhanced Transfer Value exercise.
We recently shared how the transactions market in 2021 was the third busiest on record, along with our prediction that 2022 will see over £40bn of annuity transactions. Indeed, many trustees and sponsors have now integrated a buy-out target into their journey plan but we believe an often underutilised part of these plans is a clear strategy for member options. Such a strategy would not only ensure members are well-informed around the choices they have, but would ultimately accelerate the journey to a buy-out transaction - reducing cost and risk for the scheme.
“A well designed ETV exercise results in more members making good retirement decisions, while accelerating the journey to full-funding and reducing the ultimate costs of a buyout transaction.”
A key part of developing this member options strategy should include consideration of an enhanced transfer value (ETV) exercise, which we explore further below.
Our work with the leading firms of financial advisers shows that the greater flexibility available by a transfer to a defined contribution (DC) solution has made a transfer attractive to a number of members. For example, some members over age 55 have been able to retire earlier by reshaping their income around the pensions they have in other arrangements and their State Pension. Notwithstanding this, it is important to note that the greater certainty and guarantees provided by a defined benefit (DB) pension means it’s usually going to be the right choice for the majority of pension scheme members to retain their DB pension.
As your pension scheme approaches buyout, there is a strong rationale for your scheme to consider running an ETV exercise before the scheme gets too close to full funding (perhaps above 95%) – when the focus normally shifts to engaging the insurance market and executing your transaction.
Let’s look at how an ETV works…there are two key parts to the “enhancement”:
01
This is achieved by providing enhanced education (typically in written form but increasingly online) alongside access to retirement tools and paid-for financial advice. This enables scheme members to consider their options fully and make the best choice for their circumstances. Interestingly, this level of education and support would not be available after a buyout as the responsibility has fallen to the insurer, who usually adopt a more “hands off” and standardised approach to communications.
02
The high cost of insuring non-pensioner members means that there is a typically an opportunity for your scheme to be more generous to members than the normal transfer terms while still providing savings against your buyout funding target (this can arguably be thought of as sharing some of the additional cost you would otherwise be willing to pay to an insurer). We have seen enhancements typically in the range 10% to 20%, so it’s important to consider your scheme specifics in designing the right offer for your members. The offer also typically results in terms more generous than those that would be offered by an insurer in the future (although there’s a wide range of approaches adopted by insurers).
A well designed ETV exercise results in more members making good retirement decisions, while accelerating the journey to full-funding and reducing the ultimate costs of a buyout transaction (with the savings against buy-out cost more than offsetting the cost of implementation and the enhancements paid to members).
Over the last few years, we have worked in partnership with the trustees of a DB scheme to develop a strategy to achieve a full buyout. Alongside a number of other measures (including reviewing investment strategy, documenting data and benefits and progressing GMP Equalisation), the trustees decided to implement an ETV exercise (offering a 10% enhancement to standard transfer values) when they were 90% funded on their buyout measure.
The trustees were delighted that 70% of their membership engaged with the financial adviser, gaining invaluable information about the pros and cons of their DB pension instead of transferring to a DC arrangement. A number of the members went on to retire or take the transfer value option and the overall outcome was that the scheme’s buyout deficit reduced by 25%. Most importantly, the scheme is now able to engage with the insurance market to fully buyout and windup the pension scheme a couple of years earlier than would otherwise have been the case.
For further information, please contact your WTW consultant or Tom Wilton from WTW’s specialist Member Options team.
