Companies with defined benefit pension schemes are stating they are willing to pay for regulated financial advice for members and are reviewing transfer fund values, as they assess the opportunity for pension freedoms to help reduce liabilities.
Consultancy Mercer has revealed a spike in the number of UK employees requesting transfer quotations for their defined benefit pension, which had risen 60 per cent from a long-term average of around 1,500 a month to more than 2,500 in March.
Retirement freedoms came into force at the beginning of April and it was expected that many more would seek to transfer out of defined benefit schemes, which are not covered by the new rules, to money purchase alternatives to access their funds.
Actual transfers did not see a similar increase, with 440 members in schemes administered by the firm agreeing a settlement, in line with long-term averages.
Matthew Demwell, partner and UK head of member options at Mercer, said that it was not yet known how many were likely to proceed with transfers - and he cited the cost of taking mandatory advice as a key barrier for many.
Mr Demwell said: “It may be that many may decide not to proceed with a transfer. We suspect that some may be reluctant to progress if they have to pay for financial advice themselves.”
Under new rules that were included in the legislation and which are currently subject to consultation by the Financial Conduct Authority, individuals with more than £30,000 in a fund must seek regulated financial advice overseen by a qualified transfer specialist.
FTAdviser revealed last week that a number of advisers have received requests from individuals to produce letters for a modest fee stating they have received advice, in order to persuade providers to proceed with transfers.
None of the advisers spoken to by FTAdviser or who have since come forward have agreed to produce the letters, but it was generally supposed the ‘clients’ were seeking to avoid paying potentially more than £1,000 to get formal advice which would likely advise against a switch.
Mercer said that in order to circumvent this obstacle, “increasing numbers of employers are willing to pay for at least some advice”. It added many are also reviewing with trustees “how much they offer as transfer values”.
Matthew Demwell said: “This [pension freedoms] certainly represents an opportunity for employers and trustees to reduce the sometimes crippling burden of pension costs but, clearly, to ensure that people have enough in their retirement, the process must be carefully managed.”
According monthly data published by the Pension Protection Fund, as at the end of March the 6,057 private sector defined benefit schemes it covers were running a combined deficit of close to £293bn at the end of March this year. A year ago the figure was £39bn.
Pension deficits are often cited as posing a major financial risk for firms with sigificant defined benefit legacy commitments. Tesco, for example, recently revealed in results showing a record £6.4bn pre-tax loss that it had a pension scheme deficit of £3.9bn, which is costing it £270m a year.
Tesco has written to its 300,000 staff as it consults on plans to closes its DB pension in favour of a cheaper defined contribution option, which would not leave the firm exposed to longevity risk.
Mercer said that cumulatively around 22,000 people in DB schemes it administers have requested a quotation since February 2014.
Pension transfers have been at the centre of advice concerns over so-called ‘insistent’ clients in recent months, after the Personal Finance Society encouraged advisers not to process business that goes against a recommendation and called on regulators to give assurances over future claims.
Clients are obliged to take advice before transferring but are free to ignore the recommendation if they wish. The FCA, which as estimated around 35,000 people may seek to move out of DB schemes or away from ‘safeguarded’ benefits, has said advisers should document all discussions.
ashley.wassall@ft.com, emma.hughes@ft.com
To view FTAdviser’s recent live webinar on pension advice in the wake of new freedoms, including a module dedicated to pension transfers, and earn CPD minutes, click here.
