DB members aged 60-65 that transfer out may end up costing the scheme more than if they took their pension from the scheme, Aon Hewitt has warned.

According to Aon Hewitt’s retirement practice partner, Paul McGlone, transfer values are based according to the ‘best estimate’ of the fund, while the reserves held for the member if they stay in the scheme is based on ‘prudence’, but often takes into account that member would take their tax-free cash lump sum.

“For instance, if a member’s benefit is £100,000 on a best estimate basis for a transfer value, from a funding perspective I will add something onto that to allow for prudence. So I might make it £105,000. But I will then take some off because I expect the member to take cash instead of a pension and that saves me money. That might take the funding reserve I keep for that member if they drew their pension from the scheme back down to £95,000,” he explained.

It is more likely that the transfer value would be higher than the fund reserves for members aged 60-65 because “there is more prudence built into the funding for younger people, meaning the funding reserve tends to be higher than the transfer value for younger people”, McGlone added.

Due to the Budget, schemes will experience people in their 60s, who previously hardly ever transferred, increasingly doing so and as a result may have to pay out more than they are reserving for members.

To counter this, schemes need to establish whether these transfers would cost more than their reserves, and if so to adjust how they calculate their reserves, McGlone advised. This could be through adding in assumptions that a certain percentage of members will transfer out, along with the expectations of the number of members staying in the scheme that will take a tax-free cash lump sum.

“The difficulty is we have got years and years of experience with people taking tax-free cash, so we know what proportion of people takes this, and its most people. What we don’t have is any experience of what proportion of people will transfer out at retirement as it is new,” he added.

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