Defined Benefit (DB) transfers surge

There has been a huge surge in demand for transfers out of Defined Benefit (DB) pension schemes since ‘pension freedoms’ were launched back in April 2015. Before this date the number of transfers was relatively modest, with regulators warning that advisers should start from the position that a transfer was not in a members’ best interest. This stance meant that many advisers didn’t take on DB transfer work at all!

What’s fuelling this surge?

There’s a kind of DB transfer perfect storm happening at the moment. Not only are employers feeling the financial pressure of their current and future DB liabilities meaning that removing these liabilities can be increasingly attractive. This desire to reduce future liabilities, along with sustained low gilt yields, has resulted in record high figures for Cash Equivalent Transfer Value1. For DB scheme members, there’s the obvious appeal of high CETVs – research for a joint policy paper in August 2017 found members were typically being offered 25-30 times the value of their annual pension2. And finally there have been favourable changes to the tax treatment of Defined Contribution (DC) pensions, offering some members much greater flexibility than is afforded by their DB scheme.

DB flexibility may be underappreciated

In a blog post in August, Steve Webb (former pensions minister) pointed out that DB schemes can offer some flexibility in their own right. This may include taking a reduced pension early or an enhanced pension later, as well as ‘frontloading benefits’ by exchanging non-statutory inflation increases for a higher starting pension. Webb suggested these options were not being routinely drawn to members’ attention.

Advisers concerned about DB transfer business

Financial advisers are required to have specific authorisation from the regulator (the Financial Conduct Authority) to undertake transfer business. But some advisers have become concerned about insistent clients – those who disagree with their adviser’s recommendations on DB transfers. According to a recent survey nearly two out of three advisers fear that they are at risk of future liabilities from advice that is contested. Advisers biggest fear for consumers who transfer is that they are surrendering a guaranteed income for life, while another fear is that customers don’t understand the investment risks of moving into defined contribution (DC) pensions. Making decisions about moving pension pots is important not least because movements cannot be undone.

And finally…

If the value of your DB scheme is £30,000 or above you’ll have to take advice from a regulated financial adviser before you can transfer. This rule is there to protect you and make sure you’re aware of all the pros and cons of transferring. Even if the value of your scheme is below £30,000, it’s still a good idea to take advice, unless you’re absolutely sure this is what you want to do and you fully understand the consequences. Our view is that most people won’t have a clear enough grasp of all the facets of such a transfer without the help of a specialist adviser.

 

1 CETVs is calculated by the DB scheme as being the monetary amount needed to purchase equivalent benefits elsewhere.

2 DB transfers surge –are members getting the quality advice that is needed? LCP, 23 August 2017

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