New pensions see transfer values cut by 'half'

New pensions see transfer values cut by 'half'

Transfer values in collective defined contribution schemes could be worth half those offered by final salary plans, an expert has said.

Steven Taylor, partner of consultancy firm LCP, said the lack of guarantees in the new type of pension means values would not match those offered by the pensions they are designed to replace.

Although he added the value quoted will depend on the way the transfers are modelled.

CDC pension funds differ from DB plans because do not guarantee a particular income in retirement and instead have a target amount they pay out based on a long-term, mixed-risk investment plan.

They also differ from defined contribution pensions because they do not produce individual pension pots. Instead they invest savings in a large collective pot which provides an income in retirement to its members.

Mr Taylor, alongside other pension experts, is calling on the government to introduce an advice requirement for CDC transfers, similar to that found in defined benefit schemes, and for guidance from the regulator to assist professionals catering for this new market.

The government rubber-stamped the new type of pension in March but failed to clarify if financial advice will be needed for transferring out of the schemes if they are above a certain value, as is currently the case for DB schemes above £30,000. 

Mr Taylor said one of the reasons CDC transfer values are low compared to current DB transactions is that they will be calculated at a best estimate assumption.

He explained: "DB transfer values are very high at the moment because the discount rates that are used to calculate them are very low, and that is because by the time people get close to retirement, you assume that those schemes are invested in a low risk way, because there are a lot of guarantees around DB pensions.

"For CDC, one of the reasons they are seen as a good way forward is that whilst from the members’ perspective they provide a pension, the way they do that is by sharing lots of investment and mortality risk between members. This means the schemes, which don't need to provide guarantees, can invest in a much more growth orientated way than a DB scheme would."

Steven Cameron, pensions director at Aegon, said calculating transfer values in the new pensions was complex and could create an issue around intergenerational fairness.

He said: "The way in which target benefits will be calculated and how target benefits are turned back into transfer values will have a huge impact on intergenerational fairness. Younger members should get more target benefit for the same contribution compared to older members, as there is longer for investments to grow.

"Alternatively, younger members should pay less for the same target benefit. Provided this is fair, then calculating transfer by discounting target benefits should also be fair."

Mr Taylor and Mr Cameron agreed that financial advice was needed for CDC transfers due to their complex nature.