Fiona Matthews highlights the 'best practice' for implementing an ETV exercise

Enhanced transfer value (ETV) exercises are a popular tool in the corporate de-risking toolbox. Yet ETV projects are complicated, cost a lot of money and can take a considerable length of time to implement effectively. To further complicate things, these projects generate more than their fair share of public interest. Not only is Steve Webb particularly interested in exercises of this ilk, ETV exercises are also the subject of regular newspaper headlines which often paint them in a particularly bad light.

As such, it does not take a rocket scientist to realise that a corporate decision to carry out an ETV exercise will not be without its critics. The key to success is to implement an exercise that follows good robust practice.

Attaining the ideal
The Pensions Regulator's principles are a good place to start when it comes to striving to attain the right standard. These drive the following key aspects of an ETV offer:

Make sure the offer is reasonable
There are many ways that an offer can be designed. ETVs which look to offer enhancements where the majority of individuals will get a recommendation to transfer from a financial adviser (a "green light level") will clearly be better than those that don't. How the enhancement can be taken is also vital to good practice. Designs where the enhancement to the "green light level" must be paid as a transfer payment are more likely to lead to individuals receiving pensions of a similar level to their defined benefit promise than those where all of the enhancement can be taken as cash.

Paying the right amount of cash at the right time
As cash is king in times of economic uncertainty, it is crucial that any cash offered is not at a level that adversely alters members' decisions. Restrictions so that cash is only offered above the "green light level" and also monetary limits can help to address concerns here.

In terms of the 'right time' to offer cash, Steve Webb does not consider offers of cash at Christmas as good practice. This places yet more time constraints on when an offer can be made as fitting in with this as well as the tax year and the corporate financial year is challenging.

Engage with the trustees at the earliest opportunity
TPR has left no doubt that it would like the trustees to be heavily involved in ETV exercises. Early engagement with the trustees means that their concerns can be addressed before the design has been finalised. Listening to their views on how the exercise should be communicated and implemented is also important to achieve a harmonious and efficient working relationship. Adverse relations can lead to increased costs.

Get the communications right
For many pension scheme members, an ETV offer could possibly involve one of the most complicated financial decisions that they have to make in their working life. TPR’s requirement that communications are clear, jargon-free and easy to understand is just the starting point. Good communications should go beyond this and ensure that the message is balanced. Members should be told the company's reasons for making the offer and the pros and cons of accepting or rejecting it so they can make informed decisions. Offers which are positioned as a 'carrot' to members are more likely to lead to decisions which may not make good financial sense.

Members should receive good quality individual financial advice
It is essential that members are guided along the way by competent IFAs who have been chosen using a robust selection process. The IFAs must have the right qualifications and the capacity to handle the size and nature of the membership population involved in the project.

Advice should be compulsory and paid for by the company. It is also crucial that it is not only independent of the company but seen as being so by the members. Remunerating financial advisers in ways which are not affected by take up rates and avoiding any practices which may be regarded as pressurised selling tactics should help to reassure members that the IFA is really working for them.

Written by Fiona Matthews, head of implemented settlement solutions at Towers Watson

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