Pensioners may be short-changed over cash sum

The Actuarial Profession has today written to the DWP and the Pensions Regulator urging them to take action to ensure pension scheme members are provided with appropriate information when considering exchanging pension for a cash sum at retirement.

Gordon Sharp, Chairman of the Profession’s Pensions Board said: “We’re concerned that some pension scheme members may be taking the decision to exchange pension for a cash sum at retirement without having a clear idea of the value of the benefits they are giving up.

“We know that typical cash commutation terms can result in a cash sum that is much less than the cost of replacing the pension surrendered.

“Pension scheme benefits have become very valuable because people are living longer and pension schemes enjoy greater legal protection. We need to make sure people are getting the appropriate advice to help them make these important decisions at a key point in their lives.”

In its letter, the Profession urges the DWP and the Pensions Regulator to consider:

implementing a requirement for a risk warning and suggestion that members should take financial advice if they are considering commuting a large amount of pension to cash; or

subject to acceptable compliance costs, introducing disclosure of cash commutation terms to members retirement benefit statements so that members have an indication of the cost of replacing the benefit foregone on commutation.

When pension scheme members retire, they are usually given the option to surrender some of their pension for a cash lump sum. This is usually described as ‘commuting’ pension for cash or ‘cash commutation’.

The terms for exchanging pension for cash are determined by scheme rules, which vary widely from scheme to scheme. Usually these terms are determined by the trustees or the sponsoring company. They are usually not set by actuaries, although some schemes require that actuarial advice be taken, or that the scheme actuary certifies the terms.

The Profession has also written to its own members recommending they ensure their advice is up-to-date and that they clarify with their clients their obligations to advise in this area.