Relinquishing defined benefit (DB) scheme membership was once viewed as unthinkable. But while these pensions remain the envy of those unable to get such a good deal from their current employers, a range of factors have left many clients convinced that a transfer is their best option.
Advisers, aware that transfer values are not the be-all and end-all, and conscious of the risks to their own business should a switch ultimately prove unfavourable, have more reason to be wary. But cautious or otherwise, intermediaries of all stripes talk of a surge in enquiries, all of which must be addressed in one way or another.
Gemma Biddle, chartered financial planner at Eldon Financial Planning, is one adviser who has observed a jump in interest – but the subject had barely merited discussion until relatively recently.
“The firm has been running since 2003, and I can count on one hand the amount of DB transfers up until about a year ago,” Ms Biddle says.
Motivations
The most recent catalyst for the jump in interest is a notable rise in transfer values. Actuaries are required to calculate a cash equivalent transfer value (CETV) for those wishing to weigh the benefits of transferring.
The process for this forecasts specific assumptions such as inflation, future interest rates and investment growth. CETVs have shot up to staggering levels of late, fuelled by lower and lower interest rates that have produced record-low gilt yields.
“We’ve seen multiples of 40 and 50 times income relatively frequently,” says Mark Dolby, director at Beaufort Asset Management. “It’s something we talk to every single client about now. We always looked at DB schemes before, but to transfer them? Very rarely.”
Ms Biddle has experienced similar scenarios, commonly witnessing increases exceeding 30 per cent, and in response to this is now requesting CETVs on DB plans as part of every client’s annual review.
In many cases, a push has also come from schemes themselves, keen to reduce liabilities by offering deals to members. And the high-profile collapses of schemes such as Tata Steel and BHS may also have weighed on the minds of some – 60 per cent of DB members are either active or deferred, as Chart 1 indicates.
Steven Cameron, pensions director at Aegon, says, “We’ve seen an increased broad concern about security, so some individuals may be thinking ‘I was led to believe this was a gold-plated pension, but maybe that’s not the case.’ ”
Business risks
The problem for advisers is that even sky-high CETVs do not mean a transfer should be made. From the client’s perspective, relinquishing a guaranteed rising retirement income represents gambling on the future.
