Will 2011 be a period of weak activity for managed wind downs and enhanced transfer values?

Funding DB pension schemes can be risky, but there are a number of ways that trustees and sponsors can control these risks. Smith & Williamson has helped a number of schemes through enhanced transfer value, or managed wind down (MWD) exercises, which have resulted in both significant reductions in overall liabilities and much smaller and less volatile residual commitments.

Market developments suggest the period up to April 2012, will witness a resurgence in MWD activity.

What is a managed wind down?

A scheme sponsor offers to enhance the transfers that members can make from a scheme to another approved pension arrangement, for a limited period. These enhancements, if carefully calculated, can be set at levels that are attractive to members who, with professional advice, will view a transfer away from the scheme as financially beneficial.

The fixed cost of the enhancements is attractive to sponsors – it acts as a premium for achieving absolute certainty – as the liabilities in respect of these transferring members are fully discharged. This can often be done at little or no balance sheet cost, relative to the bases used to report liabilities in company accounts.

If carried out properly, very high success rates can be achieved in a way that is positive for sponsors, trustees and members.

The regulator's view

The regulator has made a number of statements over the past couple of years and produced guidance on the management of transfer exercises. The most recent communication was a joint statement with the FSA in which it set out the requirements for independent advice to members.

At Smith & Williamson, we agree with the regulator that any transfer exercises must be carried out with full disclosure to members, with no level of compulsion, and that offers should be entirely pension based, i.e. no cash incentives.

Asset recoveries

MWD activity was high in 2007 and the early part of 2008, but the impact of falling markets into 2009 meant that it was no longer financially viable to carry out such an exercise. Asset values fell, reducing the funds available in schemes. Effectively, a transfer exercise would have meant realising investment losses for a large proportion of the total assets.

In 2010, asset values recovered and trustees are considering moving assets to more secure investments. The impact of the falls have been significantly reduced, and as a result transfer exercises are looking financially viable again.

Availability of cash

Unfortunately, the timing of the reductions in assets and the access to cash resources from sponsors to fund the consequently higher top-ups drying up coincided. In addition, access to bank lending also became much scarcer.

Many businesses have now started to rebuild their balance sheets, and bank lending restrictions have eased somewhat, increasing the scope for funding transfer exercises. Indeed, banks are potentially more likely to offer lending for such an exercise, as a positive result will remove much of the risk of enduring the type of pension funding problems experienced in previous years.

Changes to revaluation from RPI to CPI

The proposals to change the baseline for statutory revaluation of pensions for leavers and pensioners from retail price index (RPI) to consumer price index (CPI) means that for schemes where the rules refer to statutory minimum, rather than an explicit revaluation definition, the liabilities for a group of deferred members might typically reduce by around 15%. Further, the level of enhanced transfer value needed to make the option financially viable to a member might reduce by a similar amount.

Assuming the reductions in both standard and enhanced transfer values, given the scheme assets will be unaffected, the total cost of a transfer exercise might fall by something in the order of 20%-25% making the opportunity that much more valuable.

Potential abolition of transfers to defined contribution schemes

As part of the consultation provided by the Department for Work and Pensions (DWP) on its plans to implement the policy of abolishing contracting-out for DC schemes, it was proposed that, from April 2012, it would not be possible to transfer benefits from a contracted-out defined benefit arrangement to a defined contribution personal pension – the most common home for an enhanced transfer value.

However, following the consultation period the Government agreed that such action would contradict its overall 'pensions simplification' agenda. Consequently such transfers will continue to be allowed, with safeguards built in.


Many sponsors completed successful enhanced transfer value exercises up to mid-2008, enjoying significantly reduced risk and volatility in their pension fund through the global economic downturn. Since then, various market conditions have conspired to make further transfer exercises difficult. As we come out of recession through 2011, combined with the implications of legislative changes on revaluation and allowable transfer values, there is likely to be a resurgence in MWD activity over the next 12 months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.