OPRA pension transfer guidance causes a stir
There has been a fair bit of fuss in the newspapers for the last week or so since OPRA (the regulatory body for occupational pension schemes) issued guidance regarding the payment of transfer values from final salary pension schemes. We’ve since seen plenty of ‘doom and gloom’ type headlines and stories all over the press which have, if my inbox is any guide, produced a fair amount of hysteria among the already embattled pensions community. A bit of the old ‘plain English’ seems to be called for. So here goes.
First things first, what’s at the root of all this? Well, the rules governing the way pension transfers are calculated and paid have not changed since the Pensions Act 1995 came into effect. So, for starters, nothing’s changed since then and this OPRA guidance does nothing really to change that.
In a nutshell, what the 1995 Act said was that pension scheme trustees could take account of the funding position of their pension scheme when paying out pension transfers. It didn’t come out and say it as plainly as that, obviously, it referred to the MFR valuation (the Minimum Funding Requirement is the three-yearly MOT type check on the health of the fund) and talked in pension-speak about CETVs (Cash Equivalent Transfer Values) instead of the more colloquial term ‘transfer value’ that normal people have at least some hope of understanding. So in pensionese you could say “Trustees can take account of the MFR position at the last MFR valuation of the scheme when quoting CETVs”, or you could say the same in plain English by saying something like “If a pension scheme was underfunded the last time its trustees took an official look at it, they can take that into account and pay out lower transfer values to people leaving the scheme”. A sort of Market Value Adjustment, if you like. And this is exactly what trustees have been doing ever since. Transfer values are being adjusted downwards sometimes to take account of the scheme funding position as determined by the last available MFR valuation. There’s nothing new in that.
This has been the position, in fact, since the 1995 Pensions Act came into force, but it doesn’t address the problem that occurs where a scheme’s last MOT (the MFR valuation) was OK, but things have got worse since. Don’t forget the funding check is only done at three-yearly intervals and in current market conditions three years can be a long time (three weeks can, in fact). So, allowing trustees to reduce transfer values if schemes used to be in a bad way, but not if they’re currently in difficulty, turns out in practice to be about as much use to some trustees as a banjo player would have been to Beethoven. Consequently, what we’ve seen ever since has been some people taking the full cash value of their full entitlement when transferring out of schemes, even if those schemes’ funding positions are now not so good. This all adds up to bad news of course for those left in the scheme.
This is all about to change and that is something we’ve known about for a long time. The snazzily named ‘Occupational Pension Scheme (Transfer Values) (Amendment) Regulations’ were drafted a little while ago and are currently in their consultation stage. Strangely enough the consultation period for these amended regulations ends on 28 March 2003, the same day as the Green Paper consultation ends. This confuses some people who think the transfer value changes are part of the Green Paper changes, which they’re not. Not these ones, anyway, there are other transfer changes that are, but keep going. We’ll get there. At least you’ve only got to read this stuff, I’ve got to write it. It’s not easy, anyway where was I? Oh yeah, the idea of this particular amendment is that trustees won’t just be allowed to adjust transfer values to take account of the last health check, but they will also be able to take account of their scheme’s ability to pay full transfer values for all members at any time.
In plain English (even though my head is beginning to hurt) this means that transfer values will be able to be reduced by trustees if there aren’t enough funds to pay full transfer values to all members, even if the last scheme valuation said everything was OK.
This makes a bit more sense, in my opinion, as it will allow trustees to work in ‘real time’ rather than just from a scheme snapshot taken at some point in the past. Their proper job, after all, is to act at all times in the best interests of all the scheme members. However, these changes won’t be in place for some time yet, some say the Summer at the earliest, and many schemes’ funding positions will clearly have worsened due to the fall in the markets over the last few years.
So this is where OPRA have come in. They’ve said that they are relaxing the requirement for trustees to issue guaranteed transfer values until these new regulations come into force as long as they are acting on the advice of the scheme’s actuary. This has led to the press headlines and the seemingly widespread fear that people are locked into final salary schemes against their will, with the implication that the whole of the UK pension system is going to Hell in a handcart any day soon. I’m not so sure this caricature, though, will turn out to be the case in practice. What the OPRA statement goes on to say is that trustees should consider a number of things before taking action to suspend the quoting of transfer values. As well as acting on actuarial advice, trustees are also advised by OPRA to consider obtaining legal advice too. After that they are encouraged to look at other alternatives which would make paying transfer values possible without acting against the interests of other scheme members. This could possibly be done by the employer making additional contributions to the scheme, for example.
If, having taken all these steps, trustees do decide to stop making transfer payments for a while, they are required to tell people why their transfer value request is being delayed and also to tell them what steps they are taking to ensure availability of a transfer value as soon as is reasonably practical. This seems to me to be quite a big step for trustees to take and I personally doubt it will lead to the wholesale shutting down of the market for pension transfers many seem to fear. It may mean some schemes will stop quoting new transfer values for a few months, but that will only be temporary and, presumably, some people who may have been considering transferring soon will now just have to wait a little longer to do so. Anyone who was already in the process of transferring before this announcement by OPRA is not affected, and their transfer value quotation will have a six-month shelf-life don’t forget, so there is no reason for them to panic.
In the longer term it may mean that transfer values offered by some pension schemes will be lower than would have been the case on the old basis, but we already knew that would be the effect of the proposed amendments, so there’s nothing new there. In my opinion it’s in line with the spirit of the 1995 Pensions Act anyway. Over time this may lead to some people who would otherwise have wanted to transfer their pension benefits staying put in their existing schemes until such a time as general economic conditions make transferring more attractive for them as individuals. The future transfer value market may become more ‘lumpy’ in this way and be tied more closely to other economic factors, but again, we’ve always known that was the way things were likely to go, so I don’t think we should find it all that surprising.
But, and as a final twist to the story, there are other longer-term changes in the wind for transfer values too. The Green Paper, which if you remember also finishes its consultation phase on 28 March, is suggesting that the MFR way of valuing schemes is a bit on the low side anyway and it is recommending doing away with it. No-one knows how that’s going to turn out, but I’d bet good money on transfer values improving over time as the new concept of scheme specific funding comes to replace the MFR. You can read up a bit more on this (if you can be bothered) by checking out another one of my BeeLines entitled “What are the MFR changes all about?”, it’s a cracking read.
The DWP Green Paper
Anyway, and to sum up; changes are coming to transfers; they’re not all bad; some are quite useful; we knew all about them anyway; we may get ‘lumpier’ transfer activity, but so what?; OPRA are taking a sensible approach that may mean a few schemes delay new transfers for a while; and, my view is that effect will be limited as it’s a big step for trustees to take and it won’t be entered into lightly. I don’t think all of us running around in headless chicken mode is justified really. It’s not the end of pensions, nor is it the end of pension transfers.
11 March 2003
This is based on Scottish Life’s understanding of current and proposed pensions legislation. These may change in the future.