Choice of insurer could vary DB members’ transfer values at buyout by a quarter

The choice of insurer at buyout “significantly” impacts the value of DB pension scheme members’ benefits, with variations of up to 25 per cent in transfer values, analysis from Hymans Robertson has revealed.

The findings showed that the commutation factor (the option for members to forgo some of their annual pension for an additional tax-free lump sum) can vary by over a third (35 per cent).

With member transfer values and commutation factors differing so much, choosing the wrong provider could lead to members missing out financially, Hymans Robertson warned.

The consultancy stated that it was vital to consider a wide range of criteria when choosing a provider for a transaction, beyond simply looking at price.

Hymans Robertson warned that the considerations in the run up to buyout, such as member options, must also be carefully managed to both protect members and to ensure the value of pension pots meet their expectations.

Hymans Robertson member options and risk transfer specialist, Iain Church, commented: “Post buyout, members’ options will be calculated on terms set by the trustees’ chosen insurer.

“Our findings highlight the extent to which these terms can differ between insurers, and the impact this can have on the quality of a member’s retirement. For example, a member exchanging £1,000 per annum of pension for tax free cash could lose out on up to £8,000 depending on which insurer their trustees choose.

“Members must remain at the forefront of all decision making, and we urge trustees looking to insure deferred liabilities to consider a range of criteria when selecting an insurer. In some instances, this could lead to trustees selecting a more expensive insurer if more generous option terms result in members getting a better retirement outcome.

"Price is only one criteria, and it’s important for schemes to fully understand what they’re buying and whether members might stand to lose out.

“Trustees should also be aware of how their current option terms stack up against insurers. As schemes get closer to buyout we encourage trustees to consider insurer option terms as part of their regular factor review process.

“Whilst schemes closer to buyout will tend to have higher factors than the average scheme, there can still be material differences. Trustees should aim to gradually transition towards insurer factors and avoid large step changes, to ensure members’ expectations for retirement are carefully managed.”

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