The volume of defined benefit (DB) pension transfers ‘shows no sign of abating’ in 2018, predicts Sir Steve Webb, director of policy at Royal London and former pensions minister.
According to Sir Steve, working age members of defined benefit pension schemes - mostly deferred members who are no longer building up rights – are still sitting on hundreds of billions of pounds in DB pension rights.
He said: "Transfer values will probably remain close to historically high levels, and if households feel squeezed in other areas of their finances they may see accessing some part of their pension rights as an attractive option to consider."
Sir Steve quoted the latest growth forecasts from the Office for Budget Responsibility, published in November with the Budget.
The UK is only expected to grow 1.5 per cent in 2017, compared with a prediction of 2 per cent made only in March.
He said: "We are told that household real incomes are unlikely to return to pre-financial crash levels for years to come."
Following the introduction of pension freedoms in 2015, defined benefit pension transfers have been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution (DC) schemes in order to access their cash.
Figures published by Mercer in April showed as much as £50bn has been pulled from final salary pension schemes in the past two years.
Meanwhile HM Revenue & Customs data showed more than £14bn has been unlocked from defined contribution pensions since pension freedoms came into effect.
A survey of advisers undertaken earlier in the year by Royal London suggested that defined benefit transfer volumes could be up around 50 per cent on 2016 to 2017, with average transfer values probably in the £350,000 to £400,000 range, Sir Steve said.
He said: "Advisers told us that the flexibilities offered by defined contribution, coupled with the advantageous treatment of death benefits were two of the big reasons for transferring."
Sir Steve also mentioned that new rules coming from the European Union will "require occupational pension schemes to communicate on a more regular basis with all of their members, including deferred members".
Schemes will be obligated to communicate the benefits value to each of their members annually under the revision of the European Union Institutions for Occupational Retirement Provision Directive (IORP II).
The new rules, which the UK market will have to transpose by 13 January 2019, just before Brexit, include the introduction of a standardised pension benefit statement.
He said: “This is also likely to generate increased interest in the options around deferred pension pots."
Steven Cameron, pensions director at Aegon, agrees that the "appeal of the pension freedoms also continues to rise".
Mr Cameron argued that next year all eyes will be on the Financial Conduct Authority (FCA), which is expected to publish a policy statement on new rules on defined benefit transfers in the first quarter of 2018.
He said: "The transfer value analysis with its assumption that transferees buy replacement annuities is expected to go.
"Instead, advisers will be expected to consider the client's income needs (rather than wishes), how the DB pension can meet these, the risks of transferring, the recommended receiving scheme, an appropriate investment strategy, as well as charges and when the client will access funds.”
Mr Cameron is hoping that "these new rules will give confidence to all parties that those seeking advice on transferring will be helped to make an appropriate, informed decision."
maria.espadinha@ft.com
