The choice of insurer upon buy-out can have a considerable impact on the value of DB pensions scheme participants’ benefits, with transfer values varying by up to 25 per cent, according to Hymans Robertson.
The study found that the commutation factor, which allows members to trade part of their annual pension for a tax-free lump amount, can vary by more than a third or 35 per cent. Member transfer values and commutation factors vary so widely that using the wrong provider could result in members losing money.
Hymans is warning that it’s vital to consider a wide range of criteria when choosing a provider for a transaction, beyond simply looking at price. Considerations in the run-up to buy-out, such as member options, must also be carefully managed to both protect members and ensure the value of pension pots meets their expectations.
Hymans Robertson member options and risk transfer specialist Iain Church says: “Post buy-out, members’ options will be calculated on terms set by the Trustees’ chosen insurer. Our findings highlight the extent to which these terms can differ between insurers, and the impact this can have on the quality of a member’s retirement. For example, a member exchanging £1,000 per annum of pension for tax-free cash could lose out on up to £8,000 depending on which insurer their Trustees choose.
“Members must remain at the forefront of all decision making, and we urge Trustees looking to insure deferred liabilities to consider a range of criteria when selecting an insurer. In some instances, this could lead to Trustees selecting a more expensive insurer if more generous option terms result in members getting a better retirement outcome. Price is only one criterion, and it’s important for schemes to fully understand what they’re buying and whether members might stand to lose out.
“Trustees should also be aware of how their current option terms stack up against insurers. As schemes get closer to buy-out we encourage Trustees to consider insurer option terms as part of their regular factor review process. Whilst schemes closer to buy-out will tend to have higher factors than the average scheme, there can still be material differences. Trustees should aim to gradually transition towards insurer factors and avoid large step changes, to ensure members’ expectations for retirement are carefully managed.”
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