In the world of defined benefit transfers what should make your employees run away?

What do you call a gigantic polar bear wearing a Santa Hat? Nothing, you just run away!

Apologies for this slightly average, cheesy cracker joke, but ‘tis the season to be jolly and all that! And what could be jollier than warmly stroking your large defined benefit (DB) promise at the end of this calendar year, and feeling all mulled-wine cosy inside?

First, however, here are my favourite runaways:

‘The Runaways’ – (of course) without whom we’d never have had Joan Jett, ploughing a furrow for awesome females in rock bands.
The slaves in ‘Spartacus’ – Immortalising Kirk Douglas back in the day, and then featuring in a very early box set for us binge-watchers, Sky’s ‘Spartacus – Blood and Sand’. (The latter with John Hannah, famous for killing the ‘Rebus’ character that Ken Stott was born to be, and for his breakthrough in ‘Four Weddings’.)
The convicts in ‘Oh Brother, Where Art Thou?’ – Starring George Clooney at his early-career best (possibly only better in ‘From Dusk till Dawn’), and John Turturro (who was awesome in the recent ‘The Night Of’). This film comes from a very rich seam of work by the Coen brothers, preceded by ‘Fargo’ and ‘The Big Lebowski’. (If you haven’t seen these, stop what you are doing now, download them, skive off for 4-5 hours, grab lots of popcorn, ice cream and enjoy!)
Six members of my 3^rd year infant class in 1973, running away from school and life – They got as far as a farmer’s hay barn, about 600 metres from the rear fence. Armed with a compass (which no one knew how to use), an open packet of Jaffa Cakes (and we all know these go stale within minutes of being opened, so no doubt they went quickly), half a flask of water (flasks in 1973 were rusty on the inside, so that must have been tasty) and a map of Sussex (handy if escaping in Sussex – less so if in North Herts). They instantly became legends at my Catholic primary school, but were royally battered by Sister Veronica’s slipper only a matter of hours later. I didn’t make the escape party, and I still don’t know why to this day, but probably a better outcome than a pair of red-raw buttocks!

We all know that the topic of DB pensions can be somewhat dry, but what precisely should your employees run away from when it comes to DB scheme transfers:

‘Wow – how much? I better transfer it!’ – Think very carefully here. The temporarily higher current Cash Equivalent Transfer Value (CETV) may be enticing, but your decision to shift your funds to a SIPP (Self-Invested Personal Pension) must be logically and emotionally sound. Some questions to ask yourself:
- Do I have other guaranteed income streams to support my needs?
- Do I have other assets to fall back on if my SIPP wobbles?
- Do I need to take the risk of managing my own pension pot?
- Have I run a cash-flow model to check the long-term sustainability of my income?
Free deals – The work involved in transferring a DB pension pot does cost money, the TVAS (Transfer Value Analysis System) report alone is close to £500. Then there’s the planning and compliance assessment hours on top of that. If someone is offering a very cheap, or zero advisory charge, it probably means the ongoing active fund management charge is going to be unpleasantly high. This will eat much further into a retirement fund in the long term.
Quick deals – This type of work is never speedy, despite the CETV quotations supplied from the likes of Mercer and co, setting mind-numbingly annoying three-month completion windows. It takes as long as it takes to do it properly.
Outsourced expertise – This means the adviser you are dealing with may not have the relevant skills, qualifications or experience. Not bad in itself, but everyone wants a margin, so it’s likely to cost more.
SIPP DIY – But for the very few (mostly industry or financially experienced people), running a SIPP properly, effectively and with adequate longevity will require some guidance along the way. This is not the same as a simple annuity deal that is one and done, irrevocable and with known longevity.
Annuity nay-sayers – The annuity is not dead and recent rate rises mean that some will undeniably be better with a ‘known-known’. For risk-averse individuals, there is no SIPP space for Donald Rumsfeld’s ‘known-unknowns’ or even ‘unknown-unknowns’!

Your employees’ DB schemes are worth their weight in gold. Most should hold them, but for a much smaller cohort, we can see the need to consider other options. Above all, they should be treasured, as they are rarer than a pile of red-nosed reindeer doo-doo. Jingle jingle, ho-ho-ho etc!

James Biggs is consulting and wellbeing director at Lorica.

This article was provided by Lorica.