Pandemic effects on DB transfers

This has resulted in a range of unintended consequences over the years, including unsuitable advice and sky-high personal-indemnity insurance premiums for advisers.  

But things have gone quiet recently, since the coronavirus hit.

Data from XPS Pensions Group, published on 14 April, showed that the number of people opting to transfer out of their DB pension in March had dropped to a record low and that transfer values fell 3 per cent.

Commenting on the impact of the pandemic, Mark Barlow, partner at XPS Pensions Group says: “With such volatile markets, it is perhaps unsurprising that transfer activity has fallen, as members shy away from big financial decisions in the current climate.”

Scott Gallacher, director and financial planner at Rowley Turton also believes people may be more wary of DB transfers due to the pandemic, as he points out: “Stock-market falls are a reminder that DB transfers are not a one-way bet and that people are taking on a lot of investment risk.” 

However, there may be reasons other than the pandemic for the decline in DB-transfer numbers, as he suggests: “There was always going to be a rush for DB transfers due to the pension freedoms, but perhaps they have now had their day.

"It is also harder for people to get advice – advisers are pulling out of the market.”

Suspension of DB transfers

There is another significant reason why fewer scheme members are transferring their DB pension at the moment – in some cases the decision may be out of their hands. 

Given current circumstances, The Pensions Regulator has given trustees free rein to suspend transfer activity for three months. 

This has resulted in uncertainty around DB transfers and made it harder for people to instigate or complete a transfer.

As Fiona Tait, technical director at Intelligent Pensions observes: “If, as some people have suggested, the FCA’s covert objective is to bring a halt to DB transfers, then Covid-19 has most certainly done them a favour.

“Even before The Pension Regulator’s announcement of a voluntary three-month suspension,  people were already complaining about the requirement to take financial advice on funds valued at over £30,000 and the lack of advisers able and willing to recommend a transfer.

"The new rules mean that someone who has already found and paid for advice could find they are prevented from proceeding at the eleventh hour.

“With each scheme making its own decision it is also very difficult for advisers to predict when or if this might happen to their individual clients. The schemes we have spoken to so far are mostly saying the situation is ‘under review’”.

And schemes may have to make some tricky decisions around whether and when to suspend processing of transfer requests, as Ms. Tait adds: “There are several key points to consider and unfortunately, most of them are double-edged.”

One of these key points is solvency, as she explains: “Scheme funding levels have already been adversely affected by continuing low interest rates and this has now been exacerbated by falling asset values.

"Increased cash outflow at such a time could potentially be the factor that tips the balance of solvency.”

Trustees may also factor in other pragmatic considerations, as Ms. Tait points out: “Although requests for transfers have fallen in recent months, most schemes have been coping with massively increased volumes of transfers since the introduction of pension freedoms and their administrative resources are operating at maximum capacity.

"This often leads to mistakes, which add to the resource issues, so some schemes may well believe that a three-month break will help them to get back on track.”

Pension-scheme problems

Henry Tapper, chief executive of AgeWage, also sees issues with capacity and solvency – and believes the impact of the pandemic could become more serious, as he explains: “I’ve been speaking to actuaries who say that 40 per cent of their clients are not providing DB transfer quotes over the lockdown, for three reasons.

"The first is operational – most pension administration units are dealing with high-priority claims. DB transfers are not as high on their list.

“Also, trustees are concerned about the vulnerability of scheme members, who may be anxious and taking decisions about their pensions that they might later regret.

“The third concern is around insufficiency reports. Pension Protection Fund (PPF) figures are showing a deficit increase.”

The PPF 7800 index April update shows that the aggregate deficit of the 5422 schemes in the index increased to £135.9bn at the end of March, up from £124.6bn at the end of February.

Mr. Tapper says: “It looks like some pension schemes will go bust – into the PPF and trustees are unwilling to pay out the full transfer amount for a DB transfer if the scheme is going into the PPF.”

It is uncertain how long the impact of the pandemic on DB transfers is likely to continue, as Mr. Tapper says: “Whether this is a long-lasting situation depends on how quickly the market can recover – and we are going into a recession or depression.”   

Carl Lamb, director at Smith & Pinching financial advisers believes the current situation may be the ‘new normal’: “I expect it to be long-lasting, which you could potentially argue is a good thing,” he comments: “Some DB transfers may have been made not on the basis of good judgement but on high numbers.”