In late March of this year the Financial Conduct Authority (FCA) published its much-awaited Policy Statement (PS18/6) detailing the new safeguards it requires of all parties involved in the defined benefit (DB) transfers market, following a nine-month review of the market and intense parliamentary pressure from MP Frank Field’s work and pensions select committee.
There are two clear and powerful drivers stimulating increased DB to defined contribution (DC) transfers that have risen close to 100,000 a year from less than half that number in 2016. The first is the eye-poppingly high transfer values being offered by employers to DB scheme holders. Transfer values are often 25 to 30 times the value of the annual pension that the occupational pension had promised – a life-changing amount of money for many.
However, it is not just the amounts of money on offer but the potential for immediate access to these sums – the arrival of 'pension freedoms' three years ago offered the potential to transfer all this money (minus charges) into a DC scheme, thereby opening up a range of decumulation options for over-55 year olds, by far the most popular of which is to take all pension assets out in one go (after tax of course).
Another reason why transfer requests are on the up, from our own research into baby boomer decumulation decision-making, is that increasing numbers of people are experiencing career shocks in their 50s. Many have been made redundant from well-paid senior positions and been forced into lower-paying positions offering less income security. Others have simply opted for more flexible, part-time working arrangements later in their working lives.
There is a clear attraction to getting the funds across to a more understandable benefit structure, even if you do not take all the money out straight away. And, what with the job shocks that many have experienced, they may even need to access some of that money from age 55 while remaining money can be moved into an array of decumulation orientated policies. Even if the DB scheme allows early retirement, it will not allow the benefits to be segmented in this way.
After discovering in its October 2015 Thematic Review that only 47 per cent of the transfer cases it reviewed adequately demonstrated suitability, the FCA fixed on hammering out and imposing new requirement on pension transfer specialists, providers and advisers, together designed to safeguard an increasing number of DB holders requesting transfer valuations.
