An increasing deficit of trust in financial services firms, including advisers, threatens to trigger further demand for unsuitable pension transfers, the industry has warned.
Recent much publicised pension scheme failures - including those of BHS, Tata Steel, and Carillion - are expected to mean more people worried about their nest eggs transfer their retirement funds, a number of industry players said.
Martin Tilley, director of technical services at self-invested personal pension (Sipp) provider Dentons, said the problem could disproportionately affect those for whom a guaranteed income in retirement, such as provided by a defined benefit pension, would be the better option because they rely solely on that income.
He said people were inclined to take money out of their pension schemes purely so they are in control.
Mr Tilley said: “Trust in the industry is as low as it has been for a long time. There’s a lack of confidence in pensions again, at a time when auto-enrolment is just about to step up the contribution levels.
“Unfortunately it will have the effect, irrespective of people being warned about transferring out of final salary schemes, that it will push more people to investigate transferring out.”
Mr Tilley said people were also increasingly worried about the government taking away the tax free lump sum, as well as their pension scheme collapsing.
“The vulnerable ones are the shop floor workers, the people who haven’t understood the value of their DB pensions in the past,” he said.
Tom McPhail, head of policy at Hargreaves Lansdown, agreed in the wake of high profile company collapses and pension scheme deficits of the likes of British Steel, Toys’R’Us and Carillion, members of final salary pension schemes were feeling anxious about the security of their pension promises.
He said: “There’s plenty of anecdotal evidence to suggest people want to take control of their own savings and this sentiment, coupled with the current high transfer values is clearly having an impact on behaviour.”
Hargreaves received 3,684 enquiries for transfers between February 2017 and January 2018, of which about a quarter went on to discuss their circumstances with an adviser and about one in 20 went ahead with the transfer, he said.
He pointed to a clustering around the ages 55 and 65, suggesting "there are lots of people looking to get hold of their pension pot as early as they can, with another substantial minority looking for advice as they actually approach retirement".
Pension transfer activity has been spurred by a number of issues, dubbed a ‘perfect storm’ by Mr McPhail, including low interest rates, high transfer values and the government's pension freedom reforms, which gave people unfettered access to their defined contribution savings but not their DB pensions.
Data from pension scheme consultancy Mercer confirmed DB transfers have been on an upward trajectory throughout the past two years.
Deborah Cooper, a partner and senior DB actuarial consultant at the firm, said: “Over the course of 2016 the number of requests for transfer values relating to defined benefits increased noticeably.
“During 2017 they have remained at the higher level. Overall, about 50 per cent more quotes were requested in 2017 than in 2016.”
She said the majority of quotes did not turn into actual payments, but the proportion that did had also increased over 2016 and remained high in 2017.
Mr McPhail said anxiety about DB pensions may be premature.
“Whilst many schemes are in deficit at present, generally the funding position is better than it was a couple of years ago.
“Even where a scheme does go bust, there is a well-managed insurance scheme in the form of the Pension Protection Fund (PPF) to make sure members still get most of what they were promised.”
He said unless there was a specific reason to transfer, people would still generally be better off staying put.
Using data from the PPF, Hargreaves found aggregate deficits stood at about £103.8bn, or a funding level of 93.9 per cent at this point in time, down from a high of £400bn or 80 per cent in 2016.
Insolvency events also remained rare, with a few dozen sponsoring employers becoming insolvent a year in recent years, the firm said.
Raj Shah, owner of Blue Wealth Capital, also recognised the link between a dwindling trust in pensions and people considering taking their cash into their own hands.
He said about a third of people he had asked whether they were happy with their final salary pension arrangement said they wanted to reconsider it, many citing worries about how secure their savings were.
"About 30 per cent of the people we asked say 'we need to think about this in more detail'.
“With final salary pensions people are starting to ask questions about whether their money is safe in there or whether they should transfer it elsewhere and take care of it themselves,” he said.
carmen.reichman@ft.com
