Fiona Matthews highlights the key issues employers need to watch out for in relation to ETVs and PIEs

The Government hopes to reap a political dividend from giving DC savers more choice over how their pension pots can be used. What if DB members like the sound of that, too? There is every chance that more employers will seek to derisk without paying the buyout cost by giving members what they want. In future DB members may routinely be presented with options in the run-up to retirement, at retirement, and even after retirement.

Of course, choices are framed differently for DB members, whose expectations are anchored to a secure annual income rather than a capital sum. Yet nearly everyone commutes pension for a lump sum and it's unlikely that this is solely for tax reasons. Fewer members accept opportunities to reshape retirement income when offers come out of the blue, but even if only a minority agree to transfer out on enhanced terms or exchange pension increases for a higher starting pension the reduction in risk can be significant.

The issues employers will have to confront in offering Enhanced Transfer Values (ETVs) and Pension Increase Exchanges (PIEs) include:

What role for cash? If a top-up to the regular transfer value can be taken as cash, members' decisions may be influenced by their short-term needs as well as their retirement pre-ferences. Some employers are comfortable with this, provided that members are properly advised; others are not. A substantial middle group recognise that members who are still some years from retirement may be less likely to engage with the process if there is no cash incentive to arouse their interest but still want to limit the role that cash can play. This 'third way' approach often involves stipulating that only enhancements above
the amount needed for an IFA to recommend a transfer can be taken
as cash, perhaps placing an absolute limit on the amount of cash.

Advice about an option? The Pensions Regulator's says employers should pay for financial advice and should usually let members accept an offer only after receiving advice. It says this guidance "can equally be applied" to PIEs as to ETVs and many IFAs have responded by putting PIE advice processes in place.

The key is to help members make informed decisions, which may involve IFAs raising issues proactively rather than merely answering members' questions. A particular challenge is how to avoid members making ill-informed decisions on PIE options at retirement. Here advice could either cover all of the options available (for example commutation as well as the pension increase exchange) or be confined to the PIE if this is offered after a commutation decision has been made.

What impact will annuity reform have? DB pensions count towards the new £20,000 Minimum Income Requirement (MIR), above which any DC savings can be accessed as cash. As increasing and non-increasing pensions count equally towards the MIR, a PIE can make it easier for members to satisfy its requirements. Where members satisfy the MIR through pensions from other employments, ETVs may suddenly be more attractive.

Check terminology is aligned: As the FSA recently pointed out in a different context, terms like "balanced" can mean different things to different people. With an ETV, the member, adviser, and default fund provider all need to be talking the same language if members are to understand what risks they are taking on.

Male annuity rates won't be available for long: While the Test Achats case may not directly affect the cash equivalent transfer values paid by occupational pension schemes, members retiring after December 2012 will not have access to sex-specific annuity rates from insurance companies. Despite the headlines this has generated, the volatility of annuity rates can account for bigger changes relative to members' expectations.

Members may have more choice over annuities: Restrictions on the use of protected rights in DC schemes are being relaxed from April 2012, so they no longer have to be used to buy spouses' pensions. This may increase the attractiveness of an ETV although it is not yet clear whether there will be any restrictions for DB to DC transfers in this respect.

Fiona Matthews, head of implemented settlement solutions at Towers Watson

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