Defined BenefitOct 1 2019

Pension schemes urged to offer partial DB transfers

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Pension schemes urged to offer partial DB transfers

Royal London has called for more pension schemes to offer partial transfers after a survey of advisers found five in six supported the option.

A joint research paper by Royal London and consultants Lane Clark & Peacock, published today (October 1), highlighted the advantages of wider access to partial DB transfers for advisers, pension scheme members and trustees.

A partial transfer occurs when some of the value of the DB scheme is transferred to a defined contribution pot while leaving some DB rights behind.

Pension funds are not legally obliged to offer partial transfers, but trustees can choose to. 

For example Ford introduced partial DB transfers this year which allowed members who make contributions to keep half of their pension and transfer the other half.

A survey by Royal London of 350 financial advisers with experience of the transfer market was included as part of the policy paper and found that in general the majority of advisers welcomed partial transfers as it offered their clients more options.

About 86 per cent of advisers said more schemes should offer partial transfers, with two in five in favour of this option stating greater flexibility in retirement planning as their main reason.

Sir Steve Webb, director of policy at Royal London and a co-author of the report, said: “Pension freedoms give people new options to shape their retirement wealth in the way that is right for them.

"But for too many people this is an all-or-nothing option, involving giving up all of their guaranteed pension income in retirement.

“We would like to see far more schemes offering partial transfers, where members can retain a secure pension but also enjoy greater flexibility. This genuinely could be the best of both worlds”.

Several advisers also pointed out that a partial DB transfer could allow clients to have a combination of a secure income and greater flexibility over the remainder of their pension pot.

Many advisers thought the option would enable them to recommend a transfer in situations where they would otherwise recommended against it.

Royal London also found that there was strong support from advisers to make partial transfers a legal right. But one third of advisers raised concerns about the potential complexity for both schemes and members.

Two thirds (66 per cent) of advisers said some of their clients who took full DB transfers would be likely to take a partial transfer instead if it had been on offer, while 72 per cent of advisers thought some of their clients who refused a DB transfer would have been likely to take a partial transfer.

Overall, advisers were more likely to think that greater availability of partial transfers would lead to increased asset flows out of DB schemes, though opinions were somewhat divided on this issue. 

Other positives of DB partial transfers stated by advisers included potentially enhanced death benefits and improved access to tax free cash. 

However, some advisers were sceptical of the additional complexity that partial transfers would entail and were concerned that they would encourage scheme members to transfer out when any sort of transfer would be inappropriate.

Paul Stocks, financial services director at Dobson & Hodge, said a move to partial transfers would be positive for members.

He said: “Introducing greater choice can only be a good thing for those considering a defined benefit transfer - not least as it would give them the option of retaining a secured income for their necessary spending. 

“Whilst it will make things more complicated for schemes, it would be a positive move for members.”

Darren Cooke, chartered financial planner at Red Circle Financial Planning said that the “all or nothing” nature of DB transfers was what caused some of the problems.

Mr Cooke said: “I can think of a few instances where clients want to keep the secured income but don't actually need all of it, particularly when coupled with their state pension income, and would prefer to be able to take some of the fund as a lump sum and have more flexibility and choice over how and when they spend those funds. 

“I think there will be many cases over the last two years where clients would have chosen to keep some of their DB benefits if they could, indeed they should have kept them. Instead they have chosen, or been advised, to cash them all in.”

He added: “I don't think we need infinite options that would require exact calculations on how much DB pension to keep and how much to cash in. Simple 25, 50 or 75 per cent split options would be very useful in a large number of cases and really help clients with their current and future planning.”

LCP also carried out research as part of the paper to find out how many schemes would consider offering partial transfers.

A survey of more than 100 pension schemes with a range of scheme sizes from less than £50m to more than £10bn found that 22 per cent of schemes had a partial transfer option in their rules, this compared with 15 per cent of schemes in 2017.

Out of these schemes 80 per cent had agreed a formal policy and communicated the option to their members.

Partial transfers were not only offered by large schemes as around two thirds of schemes which offered partial transfers had assets of under £500m.

But initial take-up has been low because of the need for this option to be effectively communicated in a timely and clear way to both members and advisers.

Jonathan Camfield, partner at LCP and a co-author of the report said: “Our research shows that growing numbers of schemes are offering partial transfers and this is to be welcomed. But many more could make this option available to their members.  

“Although there are technical and practical issues which schemes would need to address, large and small schemes have already demonstrated that these can be overcome.  

“Greater access to partial transfers would benefit members and also schemes, by reducing risks in the DB transfer process”.

It should be noted that the research took place before the FCA announced its ban on contingent charging.

In July 2019, the FCA published a consultation which contained proposals to ban contingent charging and made further proposals to seek to improve outcomes for consumers.

The regulator stated that given the advantages of DB pensions, the proportion of consumers advised to transfer out was too high and that many of the transfers that have taken place will not have been in consumers’ best interests.

Due to this, the FCA proposed a ban on contingent charging, with the exceptions of specific groups of consumers with certain identifiable circumstances, such as individuals suffering from serious ill-health or experiencing serious financial hardship.

amy.austin@ft.com

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