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Inside edge

There has been a fair bit of palaver in the newspapers since Opra issued guidance regarding the payment of transfer values from final-salary pension schemes. Whatís it all about?

The rules governing the way that pension transfers are calculated and paid have not changed since the Pensions Act 1995 came into effect and allowed trustees to take account of the funding position of the pension scheme when paying out pension transfers.

This is fine but does not address the problem that occurs where a scheme was found to be OK at its last MOT (mimimum funding requirement valuation) but things have worsened since.

So, allowing trustees to reduce transfer values because schemes used to be in a bad way, but not if they are currently in difficulty, turns out to be about as much use to some trustees as a banjo player would have been to Beethoven.

What we have seen ever since has been some people taking the full cash value of their full entitlement when transferring out, even if the scheme's funding position has deteriorated. This is bad news for those left in the scheme.

An amendment is currently going through the consultation process. The idea is that trustees will not just be allowed to adjust transfer values to take account of the last health check but will also be able to take account of the schemeís ability to pay full transfer values for all members at any time.

This means transfer values will be able to be reduced if there are not 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 will not be in place for some time yet, some say the summer at the earliest, and many schemesí funding positions will clearly have worsened.

This is where Opra has come in. It is 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 schemeís actuary.

Opra says trustees should consider a number of things before taking action to suspend the quoting of transfer values. As well as acting on actuarial advice, they are advised to consider obtaining legal advice. After that, they are encouraged to look at alternatives which would make paying transfer values possible without acting against the interests of other 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 requests are being delayed and what steps they are taking to ensure availability of a transfer value as soon as is reasonably practical.

This seems quite a big step for trustees to take and I doubt it will lead to the wholesale shutting down of the market for pension transfers that many seem to fear. It may mean some schemes will stop quoting new transfer values for a few months but that will be temporary and, presumably, some people who may have been considering transferring will just have to wait a little longer.

Anyone who was in the process of transferring before this announcement is not affected and their transfer value quote will have a six-month shelf-life.

In the short term, transfer values offered by some pension schemes may be lower than would have been the case but we already knew that would be the effect of the proposed amendments. In my opinion, it is in line with the spirit of the 1995 Pensions Act, anyway.

Over time, this may lead to some people staying put in their existing scheme until general economic conditions make transferring more attractive for them. The transfer value market may become more lumpy and be tied more closely to other economic factors but we have always known that was the way things were likely to go, so I donít think we should find it all that surprising.

I donít think all of us running around in headless chicken mode is justified. It is not the end of pensions transfers.

First published in Money Marketing, 3 April 2003