PensionsApr 15 2019

New pensions see transfer values cut by 'half'

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New pensions see transfer values cut by 'half'

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.

Mr Taylor said: "Financial advisers currently find it difficult to advise people transferring out of DB schemes, I suspect they would have very similar difficulties for CDC schemes, in part because transfer values will be a lot lower.

"There is already a capacity issue in financial advice, this is going to require some very specialist financial advice, certainly initially there will be a very small pool of IFAs equipped to give that advice."

However, he noted that it will take a long time until the transfer volumes out of CDC schemes build up.

He said: "If we are assuming that it will be a couple years until people in meaningful numbers are in those schemes, and then it will take another 10 years to actually build up significant sums, it's going to be a long time before people begin transferring out from CDC schemes."

Mr Cameron said the Financial Conduct Authority should offer guidance to advisers advising on CDC transfers.

He said: "Over time, investment and other assumptions about future experience will change. This could have an impact on how attractive a transfer value is. Advisers will also need to consider if the individual will benefit from any of the pooling of risk in CDC."

The FCA declined to comment on this matter.

Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, said while CDC benefits do not appear to be safeguarded like DB schemes, "they have advantages over pure, ‘standard’, money purchase schemes".

He said: "The main ones are lower charges and likely improved investment returns overall as there is little need to provide for guarantees."

"For these reasons, I would like to see advice in this space being delivered to individuals by an adviser who holds at least a Level 4 qualification, to specifically include passes in the pension and investment papers.

"I don’t see this as needing a fully blown pension transfer specialist analysis with all the costs that implies."

maria.espadinha@ft.com