Defined BenefitApr 10 2018

Quarter of defined benefit members transfer out

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Quarter of defined benefit members transfer out

The majority of defined benefit (DB) schemes are seeing between 20-30 per cent of members aged over 55 who have not yet retired transferring out, according to research.

The Willis Towers Watson survey polled financial advisers and combined this with its own data, to find out what more than 200,000 DB members in 400 schemes have chosen to do since April 2015.

Since the introduction of pension freedoms, the number of people transferring out of their DB pension transfers has 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 them using pension freedoms.

According to the Office for National Statistics, funds transferred out of pension schemes almost tripled to a record £34.2bn in 2017.

Abigail Currie, head of member options at Willis Towers Watson, said: "Not all DB pension schemes have taken action in relation to providing members with information about their options and provision of financial advice, but even some of these schemes are experiencing significant volumes of members transferring out."

She added: "This can bring with it a strain on scheme administration and the risk of members making decisions which may not be in their best interests.

"Where a pension scheme is more proactive in terms of member communication and the provision of access to impartial financial advice, these risks are better mitigated."

The survey covered schemes where all non-pensioners over the age of 55 - the minimum age pension benefits can be taken - were contacted by their scheme as well as those members who had naturally reached their own point of retirement and received options from the scheme administrator.

While the majority of schemes (55 per cent) saw transferring out levels of around a quarter of its members, rates varied depending on the features of the scheme.

Schemes with a weak transfer value basis, and favourable commutation and early retirement terms saw only one in 12 members transfer out.

Plans with a strong transfer value basis, financially sophisticated and wealthy population, and engaging communications registered 10 in 12 members leaving the scheme, the consultancy firm said.

Ms Currie said: "Even schemes that do proactively communicate and provide access to impartial financial advice have experienced very different outcomes amongst their population, particularly in relation to transfer exercises. 

"This highlights the importance for DB scheme trustees and sponsors of understanding the context of their scheme, communicating in an engaging way with their members, and understanding how and where members can receive the financial advice they need if they wish to consider their options."

The survey also showed a clear shift in how members who choose to use their pension pot, with a noticeable decline in savers using their entire pot of money to purchase a guaranteed income for life, in favour of a combination of products for providing income during retirement.

From the individuals that took out their DB pension in 2017/18, only 1 per cent took cash, with 10 per cent opting for an annuity, and the majority (89 per cent) opting for drawdown or a combination of products.

maria.espadinha@ft.com