Accounting
Removing pension scheme liabilities from the corporate balance sheet |
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| Accounting | |
| Written by Gary Cullen, partner and head of the national pensions unit at Maclay Murray & Spens LLP | |
| Tuesday, 24 January 2012 | |
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How to get your employees to move over to more sustainable and cost-effective pension schemes.
Final salary pension schemes are in the last chance saloon if recent media reports are anything to go by. Such ‘defined benefits’ schemes are becoming too expensive to maintain and employers are increasingly looking to incentivise workers to transfer out of salary-related pension schemes. While the objective may be to remove the long term uncertainty and risk of keeping deferred pensioners in a final salary occupational pension scheme, there are a number of issues to consider. One option is for employers to offer an Enhanced transfer value (ETV), which either involve a one off opportunity to an increased transfer value or the provision of a cash lump sum to workers prepared to leave a scheme. While ETVs have become increasingly popular with employers, to enable a scheme to offer such enhancements, the employer would be required to pay additional money into a final salary pension scheme. The additional funds would allow the scheme’s trustees to offer a one-off higher transfer value, so that deferred pensioners can transfer out their defined benefits into another defined contribution scheme or personal pension plan. As a result of a successful enhanced transfer value process, the balance sheet liabilities of the scheme can be significantly reduced, while removing the requirement for annuity buy-out funding. It also means there is no need to provide future funding for the past service deficit for members who have transferred out of the scheme, as that deficit will have been eliminated. However, there is no guarantee there will be a take-up of any offer made to the deferred members. It is more likely there will be some take-up where the employer has worked with the nominated independent financial adviser to reach a situation where the offer is recommended by the adviser. The increasing popularity of incentives to transfer out has recently come under scrutiny, with the Pensions Regulator issuing guidance on enhanced transfer values. Employers are now expected to pay for the provision of independent financial advice from a nominated adviser, chosen by the employer, so that deferred members may evaluate whether or not to accept the transfer value. The Government has also indicated that it may legislate to make these types of exercises unlawful. While it is not yet clear whether this will happen, employers reviewing the options should consider carrying out this exercise sooner rather than later. It is important for members to make a fully informed choice, backed by independent financial advice. However, it can be very difficult for a financial adviser to advise on all aspects of the proposal. It is of course a crystal ball question whether the employer will always be around to fully fund the scheme and provide the full benefit entitlement in the future. As a result, there is no guarantee that a deferred member who remains in the scheme and later retires will receive a full benefit entitlement if the employer becomes insolvent. The starting point for trustees is that such an exercise is not necessarily in the member's best interest and the transfer exercise must, therefore, be handled carefully. To retain impartiality trustees should take a neutral line, as the offer is a matter between the employer and the deferred members. However, trustees should ensure members are not misled and actively encouraged to take independent financial advice. Employers’ offers to the deferred members should be clear, fair and not misleading, open and transparent. To safeguard this process, trustees should be consulted from the outset, to avoid the situation of trustees telling the employer after making an announcement that they disagree with the content or that information provided is inaccurate. Gary Cullen is a partner and head of the national pensions unit at Maclay Murray & Spens LLP. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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