Defined Benefit  

Experts blame new rules for pension transfer decline

Experts blame new rules for pension transfer decline

Defined benefit transfers have seen the lowest take up rate in almost two years, which experts believe is linked to the introduction of the FCA's transfer value tool.

Figures from LCP showed 23 per cent of savers who asked for a transfer value quote ended up transferring out in the last quarter of 2018.

This compared with 26 per cent in the previous period and 34 per cent in the third quarter of 2017, the previous high.

Take-up rates in the quarter up to December were especially low among younger members, LCP stated. Only 6 per cent of the quotes issued to members under the age of 50 were paid out, which compared with 20 per cent in the same quarter the previous year.

According to the consultancy, which based the figures on its 78 client schemes, this drop coincided with the introduction of new rules from the Financial Conduct Authority, including the transfer value comparator.

The TVC tool became a requirement under the pension transfer rules that came into force in October 2018 and shows, in graphical form, the transfer value offered by the DB scheme and the estimated value needed to replace the income in a defined contribution product.

The consultancy firm said the drop was “perhaps a sign that advisers are being more cautious about recommending transfers to younger members, influenced by the new TVC disclosure requirements, which typically show transfer values for younger members as being a much lower proportion of the TVC than for those closer to retirement”.

The TVC is included in the appropriate pension transfer analysis, or Apta, which replaced the transfer value analysis under the rules.

LCP has previously illustrated the potential difference between readings in the TVC and the pension's transfer value.

Based on a typical 55-year-old, currently 10 years away from retirement with a DB pension of £10,000 per year, LCP predicted a gap of £190,000 between the transfer value and the replacement cost indicated by the TVC.

Overall in 2018, some 27 per cent of members who received quotes proceeded to transfer out.

The average transfer value was £402,000, more than 1.5 times the average price of a house in the UK.

LCP also noted that further changes were expected in this market, with the FCA proposing rules for a ban on contingent charging and the introduction of abridged advice.

“We support the consultation but do wonder if a full ban on contingent charging will severely restrict the availability of advisers and number of members taking advice,” LCP stated.

But Alistair Cunningham, chartered financial planner at Wingate Financial Planning, did not think the introduction of the TVC has necessarily caused a drop in transfers.

He said: "My expectations is that this is happening due to lack of available advisers, and savers taking a more cautious approach.

"Also, savers who received transfer values previously and are getting them for the second time have seen that they are lower, so it acts as a disincentive as well."