Defined Benefit  

The changing role of DB pensions

  • List the reasons DB pensions are disappearing from the private sector.
  • Identify what is behind the trend for transfers and the risks this has created.
  • Describe whether this will drive new products in the market.

This trend for DB transfers has been further highlighted by recent data from the FCA released in June 2019 revealing the supposedly growing popularity of DB transfers.

The statistics show that between April 2015 and September 2018, more than 2,400 firms provided advice on pension transfers and 234,951 scheme members received advice on pension transfers, of which 162,047 (69 per cent) were recommended to transfer.

The total value of recommended DB pension transfers during this period amounted to £82.8bn, with individuals transferring £352,303 on average, up from the £250,000 previously reported by the FCA.

Further, the FCA’s data revealed that among the firms providing advice on transfers, 1,454 recommended a staggering 75 per cent or more of their clients transfer out of their DB scheme.

As a result, the FCA has expressed its concern and disappointment at the uptick in transfer activity, citing its previous stance that pension transfers are likely to be unsuitable for the majority of clients.

Of course, the increased interest in transfers since the introduction of pension freedoms increases opportunities for fraudsters to seek to part people from their pensions.

Opportunity knocks

Government and regulators recognised the risk that individuals might make poor decisions in relation to pension transfers; and the FCA has made it obligatory for individuals to obtain appropriate independent financial advice if the value of a transfer is over £30,000.

Scheme trustees are also obliged to check that individuals seeking to complete a transfer have received advice from a suitably qualified adviser.

But, in 2017 the FCA published research that showed only 47 per cent of the advice related to DB to DC transfers that it had been able to review could be proved to have been suitable.

There have also, clearly, been too many cases of individuals being tricked into making very unsuitable investments, or simply having their money stolen from them by fraudsters, in recent years.

Criminal activity and negligent practice on the part of some advisers represents a threat to the reputation of the advisory industry – but it also creates opportunities for those advisers that do follow best practice.

Research published by Aegon in January 2019 showed that for the second year in a row, advisers surveyed by the insurer view DB to DC transfers as the area of activity that offers them the greatest potential for growth.

In addition to the trends already noted, some individuals may want to consider a DB to DC transfer because they lack faith in the long-term prospects of the employer sponsoring their DB scheme.

There have been a number of high profile examples of companies putting DB pension entitlements at risk when the company found itself in difficult financial circumstances.