Some members of UK defined benefit pension schemes are making poor decisions.
Individuals, perhaps tempted by record high values, are transferring out of these “gold plated” arrangements in their droves – around £28bn was transferred out of occupational pension schemes in the first three quarters of 2018.
Transferring is a valuable option which will be appropriate for some members.
However, there is concern in the industry that members are making irreversible decisions about one of the largest assets that they own (the average transfer value paid across our clients is £230,000 is equal to the average UK house price).
In addition, we see the risk associated with pension transfers first hand. Our pensions scam service, where a specialist talks to all members before transferring, sees signs of scam activity in around one out of every eight cases.
There are many ways to help members with their decision, including introducing engaging communications and providing appropriate support and protections. We believe that providing choice and flexibility to members is also key and this is where a partial transfer option comes in.
Many individuals find the flexibility associated with defined contribution pensions compelling.
The pension freedoms, introduced in 2015, opened up a range of valuable options to members of such arrangements. For example, it is possible to withdraw from a pension fund as and when required, almost as though it were a bank account.
These flexibilities are not immediately available to members of defined benefit pension schemes. The only way to access them is to transfer your defined benefit pension, giving up the associated security.
For members considering this, it is almost always a stark “all or nothing” decision. A choice between the flexibility associated with a transfer or the relative security provided by a defined benefit pension.
The option of a “partial transfer”, where only part of a member’s benefits is transferred, rarely makes the conversation.
Partial transfers could be the best of both worlds for members.
The challenge for a financial adviser when discussing pension transfers with an individual is one of risk.
The risk subsequently borne by a member by transferring their defined benefit pension in full is often too great for an adviser to recommend a transfer.
A partial transfer option allows a more balanced approach to risk that can be tailored to a member’s circumstances.
A choice of how much income security a member needs and consequently how much risk they can take. In the context of member choice and how members are advised, partial transfers make complete sense.
However, only a handful of pension schemes currently offer members a partial transfer option. Given the rarity of partial transfers, members and advisers do not typically ask the pension scheme if they do offer, or would consider offering, partial transfers.