The Pensions Regulator’s revelation that up to 80,000 people transferred out of defined benefit schemes last year has provoked a huge response from advisers, many of whom who are urging for reforms.
Richard Edney, director at Abacus Wealth Management, said the industry needed to review its stance.
"The transfer process defaults to a comparison of the critical yield needed on a transfer value to match the ceding annuity - when, invariably most transferees - or at least the clients I am advising - are looking to design a different sort of income in retirement and beyond.
"Retirement is different now: income requirements are 'lumpier' rather than simply upward. Hopefully, we can also see some product innovation, whereby a money purchase fund can be also converted into some form of care fund. 20th century pensions should not necessarily be the default for the 21st century.”
Two main factors have led to the surge in people wanting to transfer out of their defined benefit pension schemes.
One is soaring transfer values, linked to the fall in bond yields both recently and over the last three decades. Bond yields affect the price that pension funds must pay to meet their guarantees to their employees. Pension funds rely on bonds to fund yearly payouts. To make up for lower yields, they have to spend more to get the same annual return.
Defined benefit schemes' income for life is expensive for pension funds to maintain. As a result, they have been offering attractive lump sums to retirees as an incentive to transfer out of schemes, getting rid of the pension funds' liability to pay the retiree a future pension.
The second factor is the introduction of pension freedoms rules in April 2015, which saw the liberalisation of what people over 55 could do with their retirement pots, if they have a defined contribution pension - defined benefit pension schemes were excluded from the rule change. This exclusion has led many to transfer out of their DB scheme into a DC scheme in order to access the freedom rules and all of their pension pot.
But there is fierce debate among advisers about whether defined benefit transfers are right on such a large scale.
Patrick Connolly, spokesperson for Chase de Vere, said the firm shares concerns "about the huge number of people who are giving up guaranteed benefits by transferring out of their defined benefit pension schemes".
"There will be circumstances where this is the right decision, although our starting point for retirement income is that people should aim to have enough secure income to at least cover their basic living costs."
One adviser made the comparison between the rush for DB transfers now and the Securities and Investment Board pension review of the early 1990s, which saw an investigation into widespread pension mis-selling.
But Jane Hodges, adviser at Money Honey Financial Planning, disputed the link.
“There is no similarity to the 90's where unqualified advisers recommended transfers without any analysis, no qualifications, no decent risk assessment, no cash-flow analysis, no transfer value analysis or ceding scheme information, actively targeted and with big commissions at stake – and to top it off we recommended people leave their active pension schemes.
"We are absolutely nowhere near this and I wish we would make assessments on what is happening today only - good advisers are making good judgement based of fact, quantitative analysis and full customer engagement.
"Sadly bad ones are still muddying the waters by rubber stamping inappropriate deals and I totally agree we shouldn't have contingent charging as it causes too much conflict but consumers are not stupid, transfers are attractive in some cases and there may be good reasons why it is right for some individuals.”
