Defined Benefit  

Defined benefit transfer surge expected to increase

Defined benefit transfer surge expected to increase

Financial advisers are expecting the massive surge in interest in defined benefit transfers to increase over the next 12 months, according to survey.

The research, carried out by Investec Wealth & Investment, found 65 per cent of the 108 advisers that took part believed demand for DB transfers would increase over the coming year.

Almost a fifth (19 per cent) expected the increase to be "significant".

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Meanwhile, just 2 per cent thought demand would drop.

The survey comes as unprecedented numbers of DB members opt to cash in their guaranteed retirement incomes to take advantage of access to all of their cash in one go with pension freedoms and record high transfer values.

Since the last similar survey was done in July last year - just as low bond yields were beginning to push up transfer values - advisers have seen demand for DB transfers go up.

 Almost three quarters of advisers (72 per cent) now say clients have asked them about DB transfers, up from 68 per cent in July. 

Despite this increase in demand, however, the report found many advisers had continued to avoid the DB transfer market.

The top reason for avoiding DB transfers, cited by 71 per cent of advisers, was that it was too risky. 

Nearly half (47 per cent), meanwhile, said the process was complex and clients were resistant to paying appropriate fees.

Forty-five per cent cited a perceived lack of regulatory support. 

Almost a third (31 per cent) of IFAs said the regulator focused too much on the "headline" figures involved in a DB transfer, at the expense of "softer" client needs.

Since the introduction of pension freedoms, voices in the industry have increasingly expressed the hope that the Financial Conduct Authority will rethink its approach to DB transfers.

Particular focus has come on two issues: the mandatory focus on critical yield, which many argue is no longer relevant given annuitisation is no longer compulsory; and the FCA's default position that in most circumstances a DB transfer will leave the member worse off.

The FCA, however, has remained intransigent. In January, the regulator fired a warning shot at advice firms it believed were providing substandard DB transfer advice, signalling it was becoming stricter on the issue.

Today (28 March), a former employee of the FCA's predecessor, the Financial Services Authority, warned that the surge in DB transfers was likely to lead to another review, similar to that carried out in the 1990s.

David Penney, chartered financial planner at London-based Penney, Ruddy and Winter, said: "If we have another market correction people will see a loss in their funds as they've taken on all the investment risk themselves post-transfer out of a defined benefit scheme. They will ask questions about the advice.

"I am convinced the FCA will carry out a thematic review on this by visiting firms, to nip in the bud any potential problems 'for the greater good'. The FCA will be looking at client files."