DB transfers – are the COVID-19 floodgates about to open?

There is growing evidence that the COVID-19 pandemic is tempting defined benefit (DB) scheme members to cash in their gold-plated DB pensions. Rolls-Royce, for one, has sounded the alarm.

In response to Rolls-Royce’s announcement in May 2020 that as a result of the pandemic it intends to cut over 9,000 jobs across its global workforce, and 3,000 workers applying for voluntary redundancy by June 2020, it has been reported that there has been a sharp rise in the number of pension transfer requests by the company’s DB scheme members. The DB scheme closed to new members in 2007, and currently has approximately 7,500 active members, 20,000 deferred members, and 13,000 pensioners.

The Financial Conduct Authority (FCA), the Pensions Regulator (TPR) and the Money and Pensions Service (MaPS) have issued a joint statement in response to this surge in transfer requests. Consistent with previous guidance (see our earlier blog posts here, here and here), the statement urges both trustees and scheme members to be vigilant against the risks associated with increased transfer requests as a consequence of redundancies.

Following an alert from Rolls-Royce that the restructuring was attracting attention from various financial advisers, the FCA has issued a data request to 65 firms who have advised scheme members looking to transfer out of the DB scheme. As we have previously warned, there is growing concern amongst the regulators that certain financial advisors in search of lucrative fees are unduly  encouraging scheme members to transfer out of DB schemes, even where it would not be beneficial for them to do so. The FCA, TPR and MaPS have emphasised that “transferring out of a DB pension scheme is unlikely to be in the best interests of most consumers”. In the statement, the FCA has warned that it will take action against financial advisors where it finds evidence of unsuitable advice.

A spokesperson from Rolls-Royce stated that the company “strongly supports” the FCA’s actions and encourages the regulators to act where financial advisors are found to have given poor guidance to members. Despite the unprecedented impact of the COVID-19 pandemic on the aerospace industry, Rolls-Royce state that their DB scheme “is – and remains – well funded”.

The regulators’ actions in response to this issue are the latest example of the extreme scrutiny facing firms advising on DB scheme transfers. Coupled with potentially increased risks for trustees and administrators (see our earlier blog post here), this is an area fraught with risk and it is perhaps only a matter of time before the first class action lawsuits are filed against the industry.