Since April 2015, pension freedoms have triggered swathes of 55-plus-year-olds with defined contribution (DC) pensions to cash out. Since then, the regulators, government, advisers and product providers alike have been expressing ill-ease at the rising numbers of defined benefit (DB) scheme members transferring out of their gold-plated, accrued benefits-laden schemes into relatively stripped down DC schemes in order to access their retirement savings early.
Although there is no doubt that pension freedoms has created the incentive to transfer out of DB schemes to access retirement income early – and without the scheme’s actuarial reduction factors – there are several influences working together to accelerate the number of DB transfer requests coming through. If you are wondering about the volumes, DB transfers increased by more than 50 per cent over the past 12 months alone, according to Royal London.
The Pensions Regulator has estimated that more than 80,000 DB transfers were completed in the past year.
Firstly, DB transfer values are rising fast. According to the Xafinity Transfer Value Index they are increasing by between 3 per cent to 3.5 per cent per month at the moment. Average transfer values, according to Royal London, are 25 to 30 times the value of the annual pension the DB pension promised by way of an annuity. The difficulty of finding the financial advice required to complete a transfer of more than £30,000 led the head of The Pensions Advisory Service, Michelle Cracknell, to declare “market failure”. In many cases, those who are requesting transfer valuations are all too likely to be blinded by their own personal ‘ka-ching’ moment before they get professional help.
- There has been unease at the numbers of DB transfer requests.
- A frequently cited reason is the much more generous death benefits.
- There is also some evidence of a skills shortage among the adviser community.
Reasons for the rise
Why are valuations rising so fast? Actuarial regulations require that the transfer value must reflect the potential growth rates of the scheme’s assets and, as trustees have fled to ultra-safe – and ultra-low return – assets, we have seen transfer values soar. Meanwhile, the accounting standards that drive how DB deficits are reported in company accounts are so pessimistic that even after paying out these huge transfer values, employers see an apparent reduction in their deficit as members leave. Many DB schemes have closed to entrants and at the moment only 11 FTSE-250 companies still provide DB benefits to a substantial number of employees, according to research by JLT Employee Benefits.
The sums on offer are now so mind-bogglingly large that many members believe they will not be able to spend all the cash in their retirement lifespan. A frequently cited reason for taking these large transfer values is the much more generous death benefits that can be achieved within a Sipp. Instead of a DB pension that dies with the member, or reduces by 50 per cent before paying a spouse’s pension, taking a transfer value opens the possibility of leaving all the unused pension pot tax free to the spouse, children or grandchildren.
FCA consultation paper
The Financial Conduct Authority (FCA) just closed consultation on consultation paper (CP) 17/16, which is shaping a new, supposedly more modern system for advising on DB pension transfers. The proposed Appropriate Pensions Transfer Analysis (APTA) system seeks to properly compare the accrued benefits being given up by a DB member planning to transfer out, with what they might get in DC.