Demand for defined benefit (DB) transfer requests has soared as retirees exploit the flexibility offered by the pension freedoms.
Retirement planning specialist Intelligent Pensions saw less than one request a month during 2014, but that figure has catapulted to 14 in 2016, after quadrupling to four last year.
Steve Patterson, managing director at Intelligent Pensions in Glasgow, said this trend is being driven by “the ability to control retirement destiny” which has been enabled by the freedoms. “The changes have opened up people’s minds to the opportunity of them getting control of their pension and matching around their needs instead of having to fix retirement needs around their pension.”
Now generally only available in the public sector, DB schemes have long been viewed as the bedrock of retirement planning and any guarantees or features are lost on transfer. Because of this, Mr Patterson explained his organisation is cautious when deciding to accept this type of business. He said, “We will not process a transfer on an insistent customer basis and we made that decision from the outset of the pension freedom changes so we will only accept the transfer that’s suitable to the needs of the individual.”
However, Mr Patterson felt this represented a clear risk for advisers, as customers can ignore recommendations not to transfer and push on with an application. He added that, in many cases, customers view the improved death benefits under defined contribution (DC) schemes as preferable. “It is dangerous territory and something we have decided not to entertain,” he said.
Other organisations have recognised the inherent risks posed by this activity and decided to act. Investment platform provider Hargreaves Lansdown closed its defined benefit transfer operations in August 2015, just four months after the freedoms were introduced.
Furthermore, it recently took the decision not to restore them, unless in special circumstances such as when a client is in extremely poor health. According to the firm, there is no specific definition of “poor health”, but the client must be at retirement and have a limited life expectancy.
In June 2016, a report by professional indemnity (PI) broker Protean Risk determined PI insurers were refusing to renew contracts with IFAs conducting defined benefit transfers. The report highlighted fears held by insurers that the Financial Ombudsman would take a dim view of advisers recommending transfers out of DB schemes.
“Advisers are at risk whenever they don’t do their jobs properly,” Jeremy Askew, managing director at Essex-based Town Close Financial Planning, said. He explained that, although misselling is always possible, a crisis is unlikely.
“With relatively few advisers authorised to transact the business, many firms simply refusing to even entertain the thought, and with compliance officers all over every case, I don’t see there being a massive problem. Our firm has seen more enquiries, but many of them are ridiculous and turned away at first sight,” he added.