What’s wrong with Enhanced Transfer Values?


That’s the short answer.

The clue is in the name, it’s really difficult to see how anything ‘Enhanced’ above normal levels can be a bad thing. Yes, advice should be provided and best endeavours should be made to ensure members are fully informed and, perhaps more importantly, not misinformed. But other than that there really can’t be anything wrong with these.

This would be a really short article though if it finished there so perhaps the question we should really be asking is:

What’s wrong with Transfer Values?

The answer to this question is: lots!

The reason why there is so much negative press about enhanced transfer exercises is that transfer values themselves are inadequate. I would not generally expect a transfer value to be enough compensation to a scheme member to replicate the benefits outside the scheme. Add to this the fact that the member will be taking on extra risk and it seems completely improbable that a transfer value will be enough.

There is a good reason for this. Transfer values are set to reflect the expected cost to the Scheme of providing benefits and don’t reflect the risk and profit margins that will be added in by insurers when members take their fund and annuitise.

So transfer values are generally bad for members.

But it is a choice I hear you cry! Members don’t have to take a transfer value and for some members a transfer value is good value.

Who are these members? They are the members that are often brought up when arguments are made for enhanced transfer value exercises. They are the members who aren’t married, don’t value pension increases, in poor health etc.

But if these members transfer out then what does that mean for the Scheme? It means that the remaining members are more likely to be married and be in good health and the overall cost of the scheme will increase i.e. below average risks transfer out at average rates and leave behind above average risks. This really isn’t fair to pension schemes set up on the basis of pooled risks and hence to the remaining members who are then more likely to suffer from underfunding.

So in my opinion we shouldn’t be making a fuss about enhanced exercises. As long as we have transfer values enhanced transfer value exercises can’t be bad. We should however be making a fuss about transfer values as they are in the interests of only a very small minority!