The Pensions Regulator has sent a warning to some of the UK’s leading pension funds over their concerns that they are being too generous when offering lump sums to people cashing out of “defined benefit” retirement schemes.

Their concern is that excessively generous playouts could damage their funds – and so impact upon remaining members.

Record levels of funds are now flowing out of defined schemes – £21bn in the year to March – and because pension forms are keen to reduce their obligations they are offering relatively large sums of money to those looking to cash out.

Sir Steve Webb, director of policy at Royal London, says that scheme members are being offered 25 to 30 times their annual pension as a lump sum transfer value – and as much as 40 times in some circumstances.

This means that for someone receiving a guaranteed £10,000-per-year pension, the lump sum offered could be between £250,000 and £400,000 – potentially posing a risk if the pension scheme was in deficit, or if the employer encounters financial difficulties in the future.

“I would hope that well-run pension schemes would be taking expert advice when deciding how much to offer to members wishing to transfer out,” Sir Steve said.

“But the regulator’s letter is a helpful reminder to all schemes that they need to be fair – not only to those transferring out but also those left behind, especially where the scheme in question is in deficit.”

In a letter to major providers, the Pensions Regulator said that it was in the “best financial interests” of most members to stick with their defined benefit schemes.

A spokesman for the Pensions Regulator said: “Our primary concern is that defined benefit scheme members requesting a cash equivalent transfer value have all the information they need to make an informed decision about what is in their best interests.

“This includes understanding the fees that are charged under any new pension arrangement as these can make a significant difference to the value of the fund.

“As a result, we are working closely with the Financial Conduct Authority and The Pensions Advisory Service to provide an increased level of support to trustees and scheme members where there is uncertainty around the future of a defined benefit pension scheme.

“This includes providing letters for trustees to send members alerting them to the risks of transferring and giving practical information.”

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