Pensions – Concern about costs and advice

The size of golden handshakes to persuade people to leave defined benefit pensions is worrying The Pensions Regulator (TPR) and it has asked for a cutback.

The watchdog claims schemes are being ‘too generous’ in the lump sums they are offering to people considering leaving their final salary pensions and have asked them to make reductions.

Best deals

Costs are also concerning members of the Works & Pensions Select Committee who have launched a review into the cost of pension provision and financial advice amid concerns that savers may not be getting the best deals possible.

Under the new pension freedoms, they are to investigate if enough is being done to ensure savers are offered value for money, understand what they are being charged for any transfers and why and understand the impact of costs on retirement outcomes.

Golden handshakes

TPR believes the size of the golden handshakes offered to people wanting to leave final salary schemes could damage the remaining funds.

Final salary schemes which offer savers a guaranteed standard of living when they retire have become increasingly expensive to run in recent years and providers have been offering large cash sums to members to persuade them to transfer out.


Former pensions minister Sir Steve Webb has revealed the contents of a letter from TPR to 14 schemes, asking them to make reductions in their offers. A record £21 billion has flowed out of defined schemes in the year to March.

Sir Steve, who is director of policy at Royal London, said savers were being routinely offered 25 to 30 times their annual pension as a lump sum to transfer out but said it could be as much as 40 times.

On those figures, someone with a £10,000 a year pension could be offered anything between £250,000 and £400,000 to leave.


Sir Steve said such sums could cause problems if the pension scheme was in deficit or the firm was in financial trouble.

He said: “I would hope that well-run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out.

“But the regulator’s letter is a helpful reminder to all schemes that they need to be fair not only to those transferring out but also those left behind, especially where the scheme in question is in deficit.”

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The TPR letter warned that transfers presented ‘certain risks’ to members as they did not promise a guaranteed stream of income.

It added that it was ‘in the best financial interests’ of savers to stick with their defined benefit schemes.

Primary concern

A spokesman for TPR said: “Our primary concern is that defined benefit 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.”

Parliamentary investigation

In the parliamentary investigation, MPs also want to be sure that savers understand how the money they have transferred out is being invested, how their investments are performing and whether they have been given good value and impartial service from their financial advisor.

The committee had previously severely criticised advisors looking after former British Steel employees for ‘shamelessly bamboozling’ steelworkers into signing up ongoing advice fees for unsuitable products after they transferred out of their defined benefit scheme.

Proper advice

Concerns about proper advice, costs and charges had grown in importance because of the rapid rise of auto-enrolment workplace pensions and transfers out of defined benefit schemes. It is also concerned about the way SIPPs (self-invested personal pensions) are being run.

A spokesman said: “These developments have intensified concerns about the effect of investment management charges, transaction, advisory and other intermediation costs, in eroding the value of individuals’ savings.

Poor outcomes

“These are part of broader concerns that low levels of customer engagement and understanding, coupled with costly and opaque intermediation, risk leading to poor outcomes for pensioners.

“We found that poorly-advised individuals are at risk of their funds being transferred into vehicles with high ongoing charges, early-exit fees and expensive intermediation.”

“These developments have intensified concerns about the effect of investment management charges, transaction, advisory and other intermediation costs, in eroding the value of individuals’ savings”