As many as 6,000 savers in defined benefit pension schemes with equivalent fund values of around £840m could seek transfers to access the pension freedoms from April, even though it would not be in their interests, according to Financial Conduct Authority estimates.
In an annex to a paper published this morning setting out new rules on advice from pension schemes with ‘safeguarded’ benefits, the regulator sought to quantify how many savers might seek to ‘irrationally’ transfer.
The new rules will require all transfers from DB schemes or DC schemes with safeguarded benefits to one with ‘flexible’ benefits, to be subject to advice and overseen by a qualified pension transfer specialist, except in the case of schemes with a guaranteed annuity rate.
The FCA cited Treasury analysis produced alongside the Taxation of Pensions Bill documentation, which pointed to an average DB scheme funding ratio of 80 per cent and a ‘rational’ transfer rate of 7.6 per cent, equating to 9,000 of 120,000 schemes crystallised each year.
A ‘rational’ transfer includes one where the value released is used to pay down debt or a mortgage, or to make a suitable investment.
In addition, the FCA estimated that a further one-third to two-thirds of this number may seek to transfer where it would not be in their interests, equating to between 3,000 and 6,000 individuals.
Based on an average median fund size of £140,300 in the schemes of 55 to 64 year-olds, which the FCA states is the most likely age group to decide to transfer their pension to a DC arrangement, these transfers would relate to total value of up to £840m.
Assuming the new legislation and market changes would dissuade many transfers in any case and that others may not be covered, the FCA estimates that its rules may prevent up to a quarter of irrational transfers. It says this would mean direct consumer benefit of up to £10m.
With up to 15,000 additional transfers and 20,000 transfers taking place on average annually anyway, this means around 35,000 DB transfers may need to be overseen or checked with a specialist adviser holding a qualification, such as the CII’s AF3 certificate.
According to the FCA analysis, the Treasury estimates 7.5 hours for each advice process, meaning 175 qualified pension transfer specialists would be needed per year for the 35,000 individuals requiring advice.
A number of advisers have expressed concern over DB transfer advice in the new pensions world, with many indicating they will steer clear of this type of business to avoid costly future claims.
ashley.wassall@ft.com
