The Pensions Regulator (TPR) has warned pension schemes not to be too generous when offering lump sums to people thinking about cashing out of defined benefit (DB) retirement schemes.
TPR wrote to 14 schemes earlier this year to raise a number of concerns around increased levels of transfer activity and demanding that the risks were better explained to savers.
This is because the regulator noted a spike in people leaving DB schemes, where income is guaranteed, in return for a one-off lump sum payment. In fact, a record £21 billion flowed out of defined schemes in the year to March 2018.
Rising costs mean DB pensions have become scarce in recent years, especially in the private sector, because people are living longer. They have largely been replaced by defined contribution (DC) pensions.
According to former Pensions Minister Sir Steve Webb, in some cases DB holders are being offered up to 40 times their annual pension as a lump sum transfer value and are routinely offered 25 to 30 times their value.
This could mean that for a £10,000-per-year pension, someone could be offered anywhere between £250,000 and £400,000. Sir Steve argued that such generous payments might pose a risk if the pension scheme was in deficit or if the employer faced financial difficulties.
A TPR spokesman said that transfers from DB schemes to DC schemes are unlikely to be in the best interests of most members, although there are certain circumstances where they may be appropriate.
He added that the regulator’s primary concern is that DB scheme members requesting a cash equivalent transfer value have all the information they need to make an informed decision about what is in their best interests. This includes understanding the fees that are charged under any new pension arrangement, as these can make a significant difference to the value of the fund.